Question

Lease 1 requires 15 annual lease payments of $100,000 beginning on December 31, 2020.

Lease 2 requires 10 semi-annual lease payments of $25,000 beginning on June 30, 2021.

Lease 3 requires the first of 6 payments of $35,000 to be deferred for 4 years. Accounting standards require the three leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an annual 8% interest rate properly reflects the time value of money for the lease obligations.

Required: Calculate the amounts that will appear in Lynbrook’s December 31, 2020, balance sheet for the bonds and the three leases? You must show all your work to receive full credit.

Answer 1

Lease 1: Since 100000 is already paid on December 31, 2020 we have to take Cash flow of 14 years to show in liability
S.No.	Cash Flow	Discount rate @ 8%	Present value
1	100000	0.9259	92593
2	100000	0.8573	85734
3	100000	0.7938	79383
4	100000	0.735	73503
5	100000	0.6806	68058
6	100000	0.6302	63017
7	100000	0.5835	58349
8	100000	0.5403	54027
9	100000	0.5002	50025
10	100000	0.4632	46319
11	100000	0.4289	42888
12	100000	0.3971	39711
13	100000	0.3677	36770
14	100000	0.3405	34046
		Total Present Value	824424

In Lease 2 Compouding has been done annually.

Lease 2:
S.No.	Cash Flow	Discount rate @ 8%	Present value
1	25000	0.9623	24056
2	25000	0.9259	23148
3	25000	0.8910	22274
4	25000	0.8573	21433
5	25000	0.8250	20624
6	25000	0.7938	19846
7	25000	0.7639	19097
8	25000	0.7350	18376
9	25000	0.7073	17682
10	25000	0.6806	17015
		Total Present Value	203551

Discount Rate : 1^st payment = 1/(1.08)^6/12 = 0.9623

And for discount rate of other payments the power is increased by 1 i.e. for Year 2 : 0.9623²

For Year 3 : .9623³ and so on.

In lease 3, compounding has been done annually.

Lease 3: Discount rate of 8% is taken but the payment is made every 8 months for 4 years
S.No.	Cash Flow	Discount rate @ 8% p.a	Present value
1	35000	0.9742	34096
2	25000	0.9490	23725
3	25000	0.9245	23112
4	25000	0.9006	22515
5	25000	0.8773	21933
6	25000	0.8547	21367
		Total Present Value	146748

Discount rate = 1/(1.08)^8/12 = 0.9742

And for discount rate of other payments the power is increased by 1 i.e. for Year 2 : 0.9723²

For Year 3 : .9742³ and so on.

So the Amount which will reflect in Balance Sheet = Lease 1 +Lease 2 + Lease 3

= 824424+203551+146748

= 1174723