Question 1

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)?

Accepted Answer

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.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting to reduce the liability by the first payment made at inception.

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)?

How to approach this question

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