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 $1,900,000 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?
Part-1 | |
Computation of Lease Libility | |
Annual Lease Payment | $1,900,000 |
PV of annuity of $1, n=20, i=7% | 10.594 |
Present value of Lease payments | $20,128,600 |
Part-2 | |
Computation of Lease Libility | |
Annual Lease Payment | $1,900,000 |
PV of annuity of $1, n=0-19, i=7% | 11.3356 |
Present value of Lease payments | $21,537,640 |
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