Question

On December 31, 2021, Wildhorse, Inc. leased machinery with a fair value of $1,425,000 from Cey Rentals Co. The agreement is a 6-year noncancelable lease requiring annual payments of $270,000 beginning December 31, 2021. The lease is appropriately accounted for by Wildhorse as a finance lease. Wildhorse’s incremental borrowing rate is 11%. Wildhorse knows the interest rate implicit in the lease payments is 10%. The present value of an annuity due of 1 for 6 years at 10% is 4.7908. The present value of an annuity due of 1 for 6 years at 11% is 4.69590.In its December 31, 2021 balance sheet, Wildhorse should report a lease liability of:_______

Answer 1

$1,023,516

Step-by-step explanation:

The computation of the lease liability reported is shown below:

= Present value of annual payment - Annual payments

where,

Present value of annual payment = 270000 × 4.7908

= $1,293,516

And, the annual payment is $270,000

So, the lease liability reported is

= $1,293,516 - $270,000

= $1,023,516

We simply applied the above formula to determine the lease liability