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In: Accounting

On December 31, 2015, Burton, Inc. leased machinery with a fair value of $1,260,000 from Cey...

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.

Solutions

Expert Solution

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

ekkarill92 answered 2 years ago
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