Question

On December 31, 2015, Burton, Inc. leased machinery with a fair value of $1,260,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $240,000 beginning December 31, 2015. The lease is appropriately accounted for by Burton as a finance lease. Burton’s incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.

The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

In its December 31, 2015 balance sheet, Burton should report a lease liability of

a.   $909,792.

b.   $1,020,000.

c.   $1,127,016.

d.   $1,149,792.

I need to know how to plug it into my BA 2 Calculator.

Answer 1

Answer:  

a)The amount of lease alibility that Burton, Inc should report in the Balance Sheet as on December 31, 2015 is $9,09,792.

Present value of an annuity due of 1 for 6 years at 10% = 4.7908

Present value of the annual lease payments = 240,000 x 4.7908 = $11,49,792

Lease accounting schedule is as follows.
Date	Lease	Interest	Annual lease	Reduction in
	Receivable/	Receivable/	Receipt /	Lease receivable/
	Liability	Payable	Payment	Liability
Dec.31,2015	11,49,792	-	2,40,000	2,40,000
Dec.31,2016	9,09,792	90,979	2,40,000	1,49,021
Dec.31,2017	7,60,771	76,077	2,40,000	1,63,923
Dec.31,2018	5,96,848	59,685	2,40,000	1,80,315
Dec.31,2019	4,16,533	41,653	2,40,000	1,98,347
Dec.31,2020	2,18,186	21,819	2,40,000	2,18,181
		2,90,213	14,40,000	11,49,787