Summary Business Accounting

Question:

On June 30, 2013, Fly-By-Night Airlines leased a jumbo jet from Boeing Corporation . The terms of the

lease require Fly-By-Night to make 20 annual payments of $400,000 on each June 30. Generally accepted

accounting principles require this lease to be recorded as a liability for the present value of scheduled

payments. Assume that a 7% interest rate properly reflects the time value of money in this situation.

Required:

1. At what amount should Fly-By-Night record the lease liability on June 30, 2013, assuming that the first

payment will be made on June 30, 2014?

2. At what amount should Fly-By-Night record the lease liability on June 30, 2013, before any payments

are made, assuming that the first payment will be made on June 30, 2013?



Answer:



Requirement 1

PVA = $400,000 (10.59401) = $4,237,604 = Liability

Present value of an ordinary annuity of $1: n = 20, i = 7% (from Table 4)

Requirement 2

PVAD = $400,000 (11.33560) = $4,534,240 = Liability

Present value of an annuity due of $1: n = 20, i = 7% (from Table 6)