PROBLEM IV On December 31, 2008, Mendez, Inc. leased machinery with a fair value

Question

PROBLEM IV On December 31, 2008, Mendez, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31,2008. The lease is appropriately accounted for by Mendez as a Finance lease. Mendez's incremental borrowing rate is 11%. Mendez knows the interest rate implicit in the lease payments is 10% The present value of an annuity due of 1 for 6 years at 10% is 4.7908. The present value of an annuity due of 1 for 6 years at 1 1% is 4.6959. Required : Determine the amount of lease liability that Mendez should report in its December 31, 2008 balance sheet. PROBLEM V

Explanation / Answer

Present value of an annuity due of 1 for 6 years at 10% = 4.7908

Present value of the annual lease payments = 160,000 x 4.7908 = $766,528

Lease accounting schedule is as follows.

The amount of lease alibility that Mendez should report in the Balance Sheet as on December 31, 2008 is $606,526.

Date Lease Interest Annual lease Reduction in Receivable/ Receivable/ Receipt / Lease receivable/ Liability Payable Payment Liability Dec.31,2008 766526 0 160000 160000 Dec.31,2009 606526 60653 160000 99347 Dec.31,2010 507179 50718 160000 109282 Dec.31,2012 397896 39790 160000 120210 Dec.31,2013 277686 27769 160000 132231 Dec.31,2014 145455 14545 160000 145455 193474 960000 766526

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