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    beginner2013's Avatar
    beginner2013 Posts: 4, Reputation: 1
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    #1

    Sep 1, 2013, 08:31 AM
    How do you calculate the lease liability?
    I have an exercise, which I'm not clearly able to solve.
    I hope someone can help me.

    On January 1, 1997, Phillips, Inc leaseda a new machine from U.S.Leasing. The specific information on the lease is as follows:
    lease inception: January 1, 1997
    annual rental payment at Dec. 31 of each year: $51,352
    ecenomic life of the machine: 8 years
    market value of the machine: $275 000
    interest rate said by phillips, Inc.: 10%
    End of 7- year lease term : Dec.31, 2003

    There is also an annuity table for the period and the rate.
    if you take the 7 years and the 10% you get 4,868 from the table.

    On January1, 1997, Phillips, Inc should record a lease liability of:

    - $275,000
    - $359,464
    - $ 0
    - $ 250,000

    I was assuming that I calculate this value by taking the annual rent and mulitply it with the years, which would give me the second option.
    But then I would not need the annuity table.
    but any other calculation with the annuity rate and the rental gives me something around $249,xxx and I learnt that in this kind of test the numbers must match and not about the value.
    Fidget1's Avatar
    Fidget1 Posts: 105, Reputation: 4
    Junior Member
    		  
    #2

    Sep 2, 2013, 09:57 AM
    By my reckoning, the PV of your min lease payments is $51352 x 4.8684 = $250,002.08, or if you take it to 3 decimal places it's $51352 x 4.868 = $249,981.54.

    Either way it looks like the answer in the choices has been rounded to $250,000.

    As the PV of minimum lease payments is lower than the Market Value, then your answer is $250,000.
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