Question

On June 30, 2021, Fly-By-Night Airlines leased a jumbo jet from Boeing Corporation. The terms of the lease require Fly-By-Night to make 20 annual payments of $1,300,000 on each June 30. Generally accepted accounting principles require this lease to be recorded as a liability for the present value of scheduled payments. Assume that a 7% interest rate properly reflects the time value of money in this situation. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. At what amount should Fly-By-Night record the lease liability on June 30, 2021, assuming that the first payment will be made on June 30, 2022?
2. At what amount should Fly-By-Night record the lease liability on June 30, 2021, before any payments are made, assuming that the first payment will be made on June 30, 2021?
  

Answer 1

Solution 1:

Lease liability to be recorded on June 30, 2021 = $1,300,000 * Cumulative PV factor at 7% for 20 periods

= $1,300,000 * 10.59401 = $13,772,213

Solution 2:

Lease liability to be recorded on June 30, 2021 = $1,300,000 * Cumulative PV factor at 7% for 20 periods of annuity due

= $1,300,000 * 11.33560 = $14,736,280