Question

On June 30, 2018, 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 $700,000 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, 2018, assuming that the first payment will be made on June 30, 2019?
2. At what amount should Fly-By-Night record the lease liability on June 30, 2018, before any payments are made, assuming that the first payment will be made on June 30, 2018?

Answer 1

Solution 1:

Annual lease payment = $700,000

Interest rate = 7%

Lease period = 20 years

Lease liability on June 30, 2018 assuming that the first payment will be made on June 30, 2019 = Present value of minimum lease payments

= $700,000 * Cumulative PV factor for ordinary annuity at 7% for 20 periods

= $700,000 * 10.59401

= $7,415,810

Solution 2:

Annual lease payment = $700,000

Interest rate = 7%

Lease period = 20 years

Lease liability on June 30, 2018 assuming that the first payment will be made on June 30, 2018 = Present value of minimum lease payments

= $700,000 * Cumulative PV factor for annuity due at 7% for 20 periods

= $700,000 * 11.3356

= $7,934,917