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Francisco leased equipment from Julio on December 31, 2018. The lease is a 10-year lease with...

Francisco leased equipment from Julio on December 31, 2018. The lease is a 10-year lease with annual payments of $158,000 due on December 31 of each year beginning December 31, 2018. The present value of the lease payments is $1,030,000. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 11% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2019?

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Answer #1

Solution:

Present value of lease payment = $1,030,000

Lease liability on Dec 31, 2018 = $1030000 - first lease payment on Dec 31,2018 = $1030000 - $158000 = $872,000

Interest for 2019 = $872000*11% = $95,920

Payment on Dec 31, 2019 = $158,000

Lease liability at December 31, 2019 = $872000 - payment + interest for 2019 = $872000 -$158000 +$95920 = $809,920

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