Question

A company needs construction equipment to complete a project over the next 20 months. The equipment costs $10,000. Instead of purchasing the equipment with a 12% note, the company leases the equipment with payments of $300 due at the end of each month. For what amount would the company record the lease liability at the beginning of the lease?.

Answer 1

The amount that the company would record the lease liability at the beginning of the lease is $5, 414

How to find the lease liability?

When a payment is a constant amount and is made after constant periods, it is called an annuity. The lease payments on the equipment are a constant amount of $300 and happen every month. This is therefore an annuity.

The amount that would be recorded as lease liability would then be the present value of this annuity payment.

First, find the periodic rate on the note because the payments are monthly:
= 12% / 12 months in a year

= 1%

The present value of the payments and the lease liability is:

= Lease payments x Present value interest factor of annuity, 1%, 20 periods

= 300 x 18.04555

= $5, 414

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