Question

On January 1, 2021, a company signs a 25-year lease for land. Annual payments of $20,000 begin on December 31, 2021. The company’s normal borrowing rate is 6%. For what amount would the company record the lease on January 1, 2021 (rounded to nearest whole dollar)? Use (PV of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.)

Answer 1

Answer:

Equipment 255,667 debit

  Lease Liability 255,667 credit

Explanation:

The company will post the equiptment int accounting as the same value of the discounted lease payment.

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$  

C 20,000

time 25

rate 0.06

$20000 \times \frac{1-(1+0.06)^{-25} }{0.06} = PV$  

PV $255,667.1232

On each year-end the company will recognize the interest expense and the payment of 20,000 dollars

By the end of the lease, there will be no lease liability as all payment were made