Question

On January 1, Year One, Company A leases a truck from Ford for its entire life of 5 years, for an annual payment of $20,000 to be paid on December 31 of each year. The first payment was made on December 31, Year One. A reasonable interest rate is determined to be 10 percent per year.

Determine the amount of lease liability reported by Company A on its December 31, Year One balance sheet.

Group of answer choices

$62,700

$64,700

$63,398

$80,000

$100,000

Answer 1

$63,398

Lease liability is the present value of annual payment.
So, at the end of year 1, lease liability is the present value of annual lease payment for 4 years.
Lease liability at the end of year 1	=	Annual Lease payment	*	Present value of annuity of 1
	=	$       20,000	*	3.1699
	=	$       63,398
Working:
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.10)^-4)/0.10		i	=	10%
	=	3.1699		n	=	4