Neal Corp

Accounting Dec 22, 2020

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.

Expert Solution

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.

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