Question

On January 1, 2019, ABC Company leased office equipment from ZZ, Inc. The lease terms require annual payments of $20,000 for 20 years with the first payment being due on December 31, 2019. The interest rate on the lease is 5%, and ABC will use the double-declining balance method to record the amortization of the leased asset. Assume the equipment had a 25 year remaining useful life at January 1, 2019 and the lease contract requires the equipment to be returned to ZZ, Inc. at the end of the lease. Calculate the amount of the lease liability balance at December 31, 2020 that would be classified as a current liability. Enter your answer with two places after the decimal point (i.e., 10,123.40).

You will need to use the time value of money table factors

Answer 1

Calculation of present value minimum lease payments

Date	Installment/MLP	PF Factor @5%	PV of MLP
December 31,2019	$20,000.00	0.95238	$19047.6
December 31,2020	20,000.00	0.90703	18140.6
December 31,2021	20,000.00	0.86384	17276.8
December 31,2022	20,000.00	0.8227	16454
December 31,2023	20,000.00	0.78352	15670.4
December 31,2024	20,000.00	0.74621	14924.2
December 31,2025	20,000.00	0.71068	14213.6
December 31,2026	20,000.00	0.67684	13536.8
December 31,2027	20,000.00	0.64461	12892.2
December 31,2028	20,000.00	0.61391	12278.2
December 31,2029	20,000.00	0.58468	11693.6
December 31,2030	20,000.00	0.55684	11136.8
December 31,2031	20,000.00	0.53032	10606.4
December 31,2032	20,000.00	0.50507	10101.4
December 31,2033	20,000.00	0.48102	9620.4
December 31,2034	20,000.00	0.45811	9162.2
December 31,2035	20,000.00	0.4363	8726
December 31,2036	20,000.00	0.41552	8310.4
December 31,2037	20,000.00	0.39573	7914.6
December 31,2038	20,000.00	0.37689	7537.8
			$2,49,244.00

Present value of minimum lease payments is $249,244.

Both leased asset and lease liability should be recorded at present value of minimum lease payments.

Amortization schedule

Date	Installment	Interest @ 5%	Reduction in liability	Balance of lease liability
December 31,2019				$249,244
December 31,2019	$20,000.00	$12,462.20 (249244*5%)	$7,537.80 (20000-12,462.20)	$2,41,706.20
December 31,2020	20,000.00	12,085.31 (241706.2*5%)	7,914.69 (20000-12085.31)	2,33,791.51
December 31,2021	20,000.00	11,689.58 (233791.51*5%)	8,310.42 (20000-11689.58)	2,25,481.09
December 31,2022	20,000.00	11,274.05	8,725.95	2,16,755.14
December 31,2023	20,000.00	10,837.76	9,162.24	2,07,592.90
December 31,2024	20,000.00	10,379.64	9,620.36	1,97,972.54
December 31,2025	20,000.00	9,898.63	10,101.37	1,87,871.17
December 31,2026	20,000.00	9,393.56	10,606.44	1,77,264.73
December 31,2027	20,000.00	8,863.24	11,136.76	1,66,127.96
December 31,2028	20,000.00	8,306.40	11,693.60	1,54,434.36
December 31,2029	20,000.00	7,721.72	12,278.28	1,42,156.08
December 31,2030	20,000.00	7,107.80	12,892.20	1,29,263.88
December 31,2031	20,000.00	6,463.19	13,536.81	1,15,727.08
December 31,2032	20,000.00	5,786.35	14,213.65	1,01,513.43
December 31,2033	20,000.00	5,075.67	14,924.33	86,589.10
December 31,2034	20,000.00	4,329.46	15,670.54	70,918.56
December 31,2035	20,000.00	3,545.93	16,454.07	54,464.49
December 31,2036	20,000.00	2,723.22	17,276.78	37,187.71
December 31,2037	20,000.00	1,859.39	18,140.61	19,047.10
December 31,2038	20,000.00	952.35	19,047.65	-0.55

Current liabilities are which becomes due in the next 12 months.

Installment of 2021 is due payable within 12 months of December 31,2020.

Interest expense should be charged to p&l and reduction in lease liability should be reduced from outstanding lease liabilitiy.

Hence lease liability of $8,310.42 should be record as current liability in December 31,2020 balance sheet/