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On June 30, 2021, Fly-By-Night Airlines leased a jumbo jet from Boeing Corporation. The terms of the lease require Fly-By-Night to make 20 annual payments of $400,000 on each June 30. Generally accepted accounting principles require this lease to be recorded as a liability for the present value of scheduled payments. Assume that a 7% interest rate properly reflects the time value of money in this situation. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)



Required: 1. At what amount should Fly-By-Night record the lease liability on June 30, 2021, assuming that the first payment will be made on June 30, 2022?
2. At what amount should Fly-By-Night record the lease liability on June 30, 2021, before any payments are made, assuming that the first payment will be made on June 30, 2021?

Respuesta :

TomShelby

Answer:

Equipment 4,534,238 debit

   Lease liability 4,534,238.09

Lease liability 400,000 debit

          Cash                 400,000 credit

entries to record the equipment and the first payment on June 30, 2021

Explanation:

We solve for the present value of an annuity

We aren't given information that a first payment occurs on the date ofthe lease but this kind of business most common terms are that the payment start right away.

Thus we should assume is an annuity due.

[tex]C \times \frac{1-(1+r)^{-time} }{rate}(1+rate) = PV\\[/tex]

C 400,000.00

time 20

rate 0.07

[tex]400000 \times \frac{1-(1+0.07)^{-20} }{0.07}(1+0.07) = PV\\[/tex]

PV $4,534,238.0971

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