On January 1, 2010, Wally Company signed a four-year lease requiring annual payments of $45, 000, with the first payment due on January 1, 2010.Wally's incremental borrowing rate was 6%.Actuarial information for 6% follows: $\begin{array}{llr}
&\text {3 Periods}&\text {4 Periods}&\text {5 Periods}\
\text { Present value of an annuity due of $ 1 @ 6 \% $ } &2.83339&3.67301&4.46511\
\text { Present value of ordinary annuity of 1 @ $ 6 \% $} &2.67301&3.46511&4.21236\
\end{array}$
Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010 (rounded to the nearest dollar)?
A)$200, 931
B)$165, 285
C)$155, 931
D)$144, 555

Question

On January 1, 2010, Wally Company signed a four-year lease requiring annual payments of $45, 000, with the first payment due on January 1, 2010.Wally's incremental borrowing rate was 6%.Actuarial information for 6% follows: $\begin{array}{llr}
&\text {3 Periods}&\text {4 Periods}&\text {5 Periods}\
  \text { Present value of an annuity due of $ 1 @ 6 \% $ } &2.83339&3.67301&4.46511\
 \text {   Present value of ordinary annuity of 1 @ $ 6 \% $} &2.67301&3.46511&4.21236\
\end{array}$
 Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010 (rounded to the nearest dollar)?
A)$200, 931
B)$165, 285
C)$155, 931
D)$144, 555

Quizplus · Accepted Answer

The present value of an annuity due is used because the first payment is made at the beginning of the period. The present value factor for 4 periods at 6% is 3.67301. Thus, the leased equipment amount is $45,000 * 3.67301 = $165,285.45, rounded to $165,285.

On January 1, 2010, Wally Company Signed a Four-Year Lease