Question

The company leased two manufacturing facilities. Lease A requires 20 annual lease payments of $200,000 beginning on January 1, 2019. Lease B also is for 20 years, beginning January 1, 2019. Terms of the lease require 17 annual lease payments of $220,000 beginning on January 1, 2022. Generally accepted accounting principles require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that a 10% interest rate properly reflects the time value of money for the lease obligations

Answer 1

the present value of the lease obligation for lease A will be $1,702,712.74 while the present value of lease B will be $1,764,741.73

Explanation:

the present value of annual lease payment will be determined by discounting the total amount to be received from lease payment over years.

for lease A , Pv = A
`\fracA{1 -(1+r)^(-n) }{r}`

= $200,000( 1 - (1+0.1)
`^(20)`) / 0.1 = $1,702,712.74

for lease B , Pv = $220,000( 1 - (1+0.1)
`^-{17}`) / 0.1 = $1,764,741.73

the amount to be dicloased in the balance sheet at 31 december, 2018