On September 30, 2013, Truckee Garbage leased equipment from a supplier and agre

Question

On September 30, 2013, Truckee Garbage leased equipment from a supplier and agreed to pay $125,000 annually for 15 years beginning September 30,2014. Generally accepted accounting principles require a liability be record for this lease agreement for the present value of scheduled payments. Accounting, at inception of the lease, Truckee recorded a $1,214,031 lease liability. Required: Determine the interest rate implicit in the lease agreement. On September 30, 2013, Truckee Garbage leased equipment from a supplier and agreed to pay $125,000 annually for 15 years beginning September 30,2014. Generally accepted accounting principles require a liability be record for this lease agreement for the present value of scheduled payments. Accounting, at inception of the lease, Truckee recorded a $1,214,031 lease liability. Required: Determine the interest rate implicit in the lease agreement. Required: Determine the interest rate implicit in the lease agreement.

Explanation / Answer

According tothe question we have to find interest rate at which the present value of future payments is equal to $1,214,031.

We can use rate formulae in Excel.

Rate(nper,pmt,pv,fv,type,guess)

Here nper = no of payment years and it is 15

pmt = per year how mauch we are paying and it is $125,000. In the formulae we take it as negative since money is going out.

pv= present value how much we are recording and it is $1,214,031

fv=leave it as blank

type=0 since we are paying at end of the every year the payment

Guess= leave it blank

RATE(15,-125000,1214031,,0,)

=6%

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