Question

On January 1, 2018, Johnstone leased an office building. Terms of the lease require Johnstone to make 15 annual lease payments of $134,000 beginning on January 1, 2018. A 10% interest rate is implicit in the lease agreement. At what amount should Johnstone record the lease liability on January 1, 2018, before any lease payments are made?

Answer 1

Answer:

LEASE LIABILITY: 1,121,136

Explanation:

the lease liaibility will be the present value of an annuity-due (payment at beginning of the period)

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

C 134,000

time 15

rate 0.1

$134000 \times \frac{1-(1+0.1)^{-15} }{0.1} (1+0.1)= PV$

PV $1,121,136

The lease laibility will be for 1,121,136

interst expense will be recognize over time against the lease liability and the payment decrease the liability. at the end of the agreement the lease liaiblity will be zero as there are no pending payment.