Neal Corp
Subject:AccountingPrice:2.87 Bought7
Neal Corp. entered into a nine-year capital lease on a warehouse on December 31, 2016. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 2017, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal’s incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Neal report as lease liability at December 31, 2016?
A. $300,000
B. $327,000
C. $450,000
Neal Corp. entered into a nine-year capital lease on a warehouse on December 31, 2016. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 2017, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal’s incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Neal report as lease liability at December 31, 2016?
A. $300,000
B. $327,000
C. $450,000
D. $468,000
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Answer:
The lease liability should be the annual lease payments less the executory cost (real estate taxes) times the present value factor for an ordinary annuity of 1 for nine years at 9%.
The calculation would be: ($52,000 – 2,000) × 6.0 = $300,000.
The real estate taxes are a period cost and should be charged to expense.
Note here
this is an ordinary annuity, first payment is due on December 31,2017.
