Lessee Co. enters a 5-year lease. Payments are $10,000 annually at the BEGINNING of each year. The incremental borrowing rate is 5%. The PV of an annuity due of $1 for 5 periods at 5% is 4.55. The PV of an ordinary annuity is 4.33. What is the initial Lease Liability?

Answer options:

$43,300

$50,000

$45,500

$35,500

How to approach this question

Identify payment timing (Beginning = Annuity Due). Select correct factor. Multiply payment by factor.

Full Answer

C.$45,500✓ Correct

Lease Liability = PV of Lease Payments. Since payments are at the beginning, use Annuity Due factor. $10,000 * 4.55 = $45,500. (Note: The first payment reduces the liability immediately, but the initial recognition is the PV).

Common mistakes

Using Ordinary Annuity factor for advance payments.

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