ExpertHard1 markMultiple Choice
CPA · Question 03 · Area III: Select Transactions
On January 1, Year 1, Corbin Co. enters a 5-year lease for equipment. Annual lease payments of $100,000 are due at the end of each year. The incremental borrowing rate is 6%. The present value factor for an ordinary annuity of $1, 5 periods at 6% = 4.2124. Corbin concludes this is a finance lease.<br/><br/>What is the initial lease liability that Corbin Co. should record on January 1, Year 1?
On January 1, Year 1, Corbin Co. enters a 5-year lease for equipment. Annual lease payments of $100,000 are due at the end of each year. The incremental borrowing rate is 6%. The present value factor for an ordinary annuity of $1, 5 periods at 6% = 4.2124. Corbin concludes this is a finance lease.<br/><br/>What is the initial lease liability that Corbin Co. should record on January 1, Year 1?
Answer options:
A.
$400,000
B.
$421,240
C.
$500,000
D.
$405,310
How to approach this question
Calculate the present value of all lease payments using the lessee's incremental borrowing rate. For payments at the end of each period, use the ordinary annuity present value factor.
Full Answer
B.$421,240✓ Correct
$421,240
Under ASC 842-20-30, the lease liability is initially measured at the present value of lease payments not paid at commencement, discounted using the rate implicit in the lease or the lessee's incremental borrowing rate. Since payments are at year-end, this is an ordinary annuity calculation.
Common mistakes
Using undiscounted total payments, applying wrong discount rate, or confusing ordinary annuity vs. annuity due calculations
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