Question

On June 1, 2024, First National leased a bualding. The lease agreement calls for First National to make lease payments of $3.647.04 each month for the next two years. with the first lease payment beginning June 30. The company'5 normal bortowing rate is 76 . Required: 1. Calculate the present value of the lease payments. (Hint: Use a financial calculator or Excel.) 2. Record the lease on June 1, 2024 Complete this question by entering your answers in the tabs below.

Answer 1

The present value of the lease payments is calculated as follows:

Step 1: Determine the Monthly Interest Rate

Given the annual interest rate is 7.6%, we convert it to a monthly rate since the payments are monthly:

`\[ \text{Monthly Interest Rate} = \frac{\text{Annual Interest Rate}}{12} \]`

`\[ \text{Monthly Interest Rate} = (0.076)/(12) \approx 0.0063333 \]`

Step 2: Calculate the Present Value of Annuity

Using the formula for the present value of an annuity, we find the present value of the lease payments:

`\[ PV = PMT * \left[(1 - (1 + r)^(-n))/(r)\right] \]`

Where:

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`\( PMT \)` is the monthly payment

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`\( r \)` is the monthly interest rate

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`\( n \)` is the total number of payments

Step 3: Calculate the Present Value

Plugging in the values:

`\[ PV = 3647.04 * \left[(1 - (1 + 0.0063333)^(-24))/(0.0063333)\right] \]`

Step 4: Sum the Present Values

The present value of each payment is discounted back to the start of the lease. The total present value is the sum of these individual present values.

`\[ \text{Total Present Value} \approx $80,964.23 \]`

Step 5: Record the Lease Entry

On June 1, 2024, the journal entry to record the lease on First National's books would be:

Dr Right-of-use asset $80,964.23

Cr Lease liability $80,964.23

This entry recognizes the right-of-use asset and lease liability at the present value of the future lease payments, as per accounting standards for lease recognition.