Suppose an operating lease calls for annual payments of $500,000 for six years. If you were...

Suppose an operating lease calls for annual payments of $500,000 for six years. If you were to capitalize that lease, what would be the value of the liability on the Balance Sheet at the end of Year 2? Assume a discount rate of 6%.

	A.	$1,712,523
	B.	$1,693,606
	C.	$1,702,750
	D.	$1,722,255
	E.	$1,732,553

Solutions

Expert Solution

> Formula

Liability = Present Value of pending outflow

> Calculation

Liability at the end of year 2 = Annual Payment * PVAF ( r, n )

where PVAF is the present value annuity factor

= 500000 * PVAF (6%, 4)

= 500000 * [ 1/1.06 + 1/1.062 + 1/1.063 + 1/1.064 ]

= 500000 * 3.46511

= $ 1732553

> Answer

The correct choice is Option E.

Hope you understand the solution.

jeff jeffy answered 1 year ago

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