Question

On December 31, 2021, Crane, Inc. leased machinery with a fair value of $2125000 from Cey Rentals Co. The agreement is a 6-year noncancelable lease requiring annual payments of $410000 beginning December 31, 2021. The lease is appropriately accounted for by Crane as a finance lease. Craneâs incremental borrowing rate is 11%. Crane 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, Crane should report a lease liability of

(A) $1964228.

(B) $1554228.

(C) $1715000.

(D) $1925319.

Answer 1

Answer: $1554228

Explanation:

Calculation of the lease liability that Crane should report in its December 31, 2021 balance sheet goes thus:

Annual Lease payment= $410,000

The present value of an annuity due of 1 for 6 years at 10% = 4.7908

We multiply the lease rentals by the present value of an annuity due of 1 for 6 years at 10%. This will be:

= $410,000 × 4.7908

= $1964228

We then subtract the first lease payment of $410,000 from the value gotten above. This will be:

= $1,964,228 - $410,000

= $1,554,228.