Ron\'s Data Corp. (RDC) entered into a contract that provides RDC with the right
ID: 2548863 • Letter: R
Question
Ron's Data Corp. (RDC) entered into a contract that provides RDC with the right-of-use of a vehicle for one year at which time the asset is returned to the lessor. The fair value of the car is $40,000. Terms of the contract require RDC to make payments of $1,000 per month with the first payment due on March 31. 2018, the commencement date of the lease. RDC knows that the implicit rate in the lease is 0.5% per month. Assume that RDC elects to expense leases of a short-term nature. Determine the cost of the lease liability at the commencement date of the leaseExplanation / Answer
The cost of lease liability at the commencement of lease will be equal to present value of monthlty lease payments which is calculated as follows:-
Lease Liability = First monthly lease payment+[Monthly Lease payment*PVAF(0.5%, 11)]
= $1,000+($1,000*10.67702673)
= $1,000+10,677 = $11,677
Therefore the cost of lease liability at the commencement of lease is $11,677.
(As the lease is for one year total monthly lease payments will be 12 and first lease payment is on the beginning of the lease and remaining 11 lease payments will be discounted to their present value at 0.5% rate per month)
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