Question

On December 31, 2019, Sunland Company leased machinery from Terminator Corporation for an agreed upon lease term of 3 years. Sunland agreed to make annual lease payments of $12,000, beginning on December 31, 2019. The expected residual value of the machinery at the end of the lease term is $6,000, though Sunland does not guarantee any residual value to Terminator. What amount will Sunland record as its lease liability on December 31, 2019, if its incremental borrowing rate is 5% and the implicit rate of the lease is unknown

Answer 1

$34,313

Step-by-step explanation:

Data provided as per the question

Annual lease payments = $12,000

The computation of lease liability is shown below:-

Lease liability = Annual lease payments × Cumulative PV factor at 5% for 3 periods of annuity due

= = $12,000 × 2.85941

= $34,313

Therefore for computing the lease liability we simply applied the above formula.