PROBLEM V On January 1 2018 Lancer Corporation leased equipment from Crescent Co

Question

PROBLEM V On January 1 2018 Lancer Corporation leased equipment from Crescent Corp under a ten-year lease agreement specifying annual payments of $24,000 beginning January 1, 2018, and at each December 31 thereafter through 2026 The equipment had a cost of $150,000 and was expected to have a useful life of 13 years with no residual value. Crescent seeks a 10% return on its lease investments. By this agreement, the lease is deemed to be an operating lease. Present Value of an ordinary annuity of 1 for 10 periods at 10% Present value of an annuity due of 1 for 10 periods at 10% Present value of 1 for 10 periods at 10% 6.14457 6 .75902 0.38554 Required: a) Compute Lancer's lease liability b) Compute total lease expense for 2018 to be reported on Income statement. e amount amoct,zatone chern ermine f 2018.

Explanation / Answer

Answer 1 Computation of Lancer's Lease Liability Using present value of annuity due formula we can calculate the lease liability. Present value of annuity due = P + P*{[1 - (1+r)^-(n-1)]/r} P = Annual lease payment = $24000 r = interest rate per year = 10% n = no.of years = 10 Present value of annuity due = 24000 + 24000*{[1 - (1+0.10)^-(10-1)]/0.10} Present value of annuity due = 24000 + 24000*5.759024 Present value of annuity due = 162216.57 Lancer's Lease Liability = $1,62,217 Answer 2 Total Lease expense to be reported for 2018 Lease liability booked on 1.1.2018 $162,217.00 Less : Lease rental paid on 1.1.2018 $24,000.00 Lease liability balance $138,217.00 X Interest rate per year 10% Lease Expenses to be reported for 2018 $13,822

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