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On March 31, 2021, Southwest Gas leased equipment from a supplier and agreed to pay $350,000...

On March 31, 2021, Southwest Gas leased equipment from a supplier and agreed to pay $350,000 annually for 15 years beginning March 31, 2022. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Southwest recorded a $3,187,770 lease liability. (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:
Determine the interest rate implicit in the lease agreement. (Do not round intermediate calculations.)

Present value of lease: $3,187,770
n = 15
i =
Lease payments
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Answer #1
interest rate implicit in the lease agreement
Present value of annual lease payment = $3187770
Annual Lease payment = $350000
n = 15 years
PV factor = $3187770/350000
=9.10791
Let us check PVA of $1 table,
In that table check the row of 15 years & find out at which rate
PV factor would be equal to =9.10791
Its 7%
therefore rate implicit in the lease agreement would be = 7%
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