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berry0331
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Joined: 04 Sep 2011
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Posts: 49

Posted: 25 Apr 2012 at 21:23 \| IP Logged

I have a question for the lease liability at the beginning of the lease
term. If there's an annual lease payment at the inception of the lease, do
we just calculate the original present value of minimum lease payment like
this question, or we have to get the carrying amount after deducting the
first payment at the beginning of the lease? Thanks in advance!

Question CPA-00419

Robbins, Inc. leased a machine from Ready Leasing Co. The lease qualifies
as a capital (finance) lease and requires 10 annual payments of $10,000
beginning immediately. The lease specifies an interest rate of 12% and a
purchase option of $10,000 at the end of the tenth year, even though the
machine's estimated value on that date is $20,000. Robbins' incremental
borrowing rate is 14%. The present value of an annuity due of 1 at: 12% for
10 years is 6.328 and 14% for 10 years is 5.946. The present value of 1 at:
12% for 10 years is .322 and 14% for 10 years is .270.
What amount should Robbins record as lease liability at the beginning of
the lease term?

a. $62,160 b. $64,860 c. $66,500 d. $69,720

Explanation
Choice "c" is correct. The lessee should record the capital (finance) lease
at the lower of (1) present value of minimum lease payments or (2) FV of
asset at the inception of lease. The FV is not given. The interest rate is
12% (lessor's rate is used only if lower or the implicit rate is not known).
The lease payments begin immediately (annuity due basis). The bargain
purchase option must also be capitalized.

astone
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Joined: 23 Mar 2011
Location: United States
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Posts: 91

Posted: 25 Apr 2012 at 22:26 \| IP Logged

Present Value of Minimum Lease Payments

Payment 10,000 * 6.328 = 63,280

Bargain Purchase Option 10,000 * 0.322 = 3,220

PV Min LP 66,500

What amount should Robbins record as lease liability at the beginning of the lease term?

The first entry would be to record the present value of the minimum lease payments. The next entry would record the first payment, which would be applied to the principal only. The effect of these two entries are not netted together, but rather made in two separate entries. At year end an entry would be made to accrue interest incurred but not paid. In addition, an entry would be made to move the current principal portion from long term liabilities to current liabilities.

berry0331
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Joined: 04 Sep 2011
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Posts: 49

Posted: 26 Apr 2012 at 10:54 \| IP Logged

Thank you so much!

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