Question

A company signed an operating lease agreement to use office space for 5 years. The company took possession and began to use the building on January 1, Year 1. Annual rent of $24,000 is due on the first day of each year. Assuming an implicit interest rate in the lease of 6%, the present value of the lease payments at the inception of the lease is $107,163. On December 31, Year 3, what amount should the company report as the lease liability balance on its balance sheet

Answer 1

$22,642

Explanation:

The amount of lease liability that will be reported in the balance sheet on December 31 year 3 can be calculated as follows

Opening Cash payment Outstanding Interest rate Closing

Year 1 $107,163 $24,000 $83,163 $4990 $88,153

Year 2 $88,153 $24,000 $64,153 $3,849 $68,002

Year 3 $68,002 $24,000 $44,002 $2,640 $46,642

Year 4 $46,642 $24,000 $22,642 $1,358 $24,000

Year 5 $24,000 $24,000 - - -

Total liability = $46,642

Non curret = $46,642 - $24,000 =$22,642

The amount of lease liability that will be reported in the balance sheet on 31 December year 3 is $22,642