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Homework answers / question archive / Neal Corp
Neal Corp. entered into a nine-year lease on a warehouse on December 31, 20x1. Lease payments of 52,000, which includes payment for non-lease component of 2,000 (stand-alone selling price), are due annually, beginning on December 31, 20x1, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal's incremental borrowing rate is 9%. What amount should Neal report as lease liability at December 31, 20x1? show the solution and explain.
Computation of Amount Neal should report as lease liability at December 31, 20x1:
Lease Payments = Annual Lease Payments - Real State Taxes
= $52,000-$2,000
= $50,000
Capitalize Lease Liability = Lease Payment*Present Value of Annuity (9%, 9 years)
= $50,000*6.0
= $300,000
Note: The rounded present value of an ordinary annuity for nine years at 9% is 6.0.
