Question

On January 1, 2017, Babson, Inc., leased two automobiles for executive use. The lease requires Babson to make five annual payments of $13,000, beginning January 1, 2017. At the end of the lease term on December 31, 2021, Babson guarantees that the residual value of the automobiles will total $10,000. The lease qualifies as a capital lease. The interest rate implicit in the lease is 9%. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided. Round your intermediate calculations and final answers to the nearest whole dollar.)

Required:

Compute Babson's recorded capital lease liability both at inception and immediately after the first required payment

Answer 1

Solution:

Annual Payments = $13,000

Present Value of Annuity Due at 9% for 5 terms (at beginning of year) = 4.240

Present Value of annual payments before first required payment = Annual Payments $13,000 x PV of Annuity due at 9% for 5 times i.e. 4.240

= $55,120

Present Value of guaranteed residual value = $10,000 residual value * PV of $1 at 9% for 5 periods i.e. 0.650

= $6,500

Computation of  recorded capital lease liability at inception

Present Value of annual payments before first required payment	$55,120
Plus: Present Value of guaranteed residual value	$6,500
Capital lease liability at inception to be recorded	$61,620

Computation of recorded capital lease liability immediately after the first required payment

Present Value of annual payments before first required payment	$55,120
Plus: Present Value of guaranteed residual value	$6,500
Less: First Payment on Jan 1, 2017	($13,000)
Capital lease liability immediately after the first required payment	$48,620

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