ExpertHard1 markMultiple Choice
CPA · Question 25 · Area 2: Select Accounts
A lessee enters a 5-year lease with annual payments of $20,000 due at the BEGINNING of each year. The rate is 5%. PV of Annuity Due (5 yrs, 5%) = 4.55. PV of Ordinary Annuity (5 yrs, 5%) = 4.33. What is the initial Lease Liability balance on Day 1 (after the first payment is made)?
A lessee enters a 5-year lease with annual payments of $20,000 due at the BEGINNING of each year. The rate is 5%. PV of Annuity Due (5 yrs, 5%) = 4.55. PV of Ordinary Annuity (5 yrs, 5%) = 4.33. What is the initial Lease Liability balance on Day 1 (after the first payment is made)?
Answer options:
A.
$71,000
B.
$91,000
C.
$86,600
D.
$66,600
How to approach this question
1. Calculate Total PV using Annuity Due factor (since payments are at start). 2. Subtract the first payment immediately because it's made on Day 1.
Full Answer
A.$71,000✓ Correct
The lease liability is initially measured at the PV of future payments. $20,000 * 4.55 = $91,000. However, the first payment is made at inception, reducing the liability immediately by $20,000. Remaining liability = $71,000.
Common mistakes
Forgetting to reduce the liability by the first payment made at inception.
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