On December 31, 2017, Eastern Inc.leased machinery with a fair value of $420,000 from Northern Rentals.The agreement is a six-year non-cancellable lease requiring annual payments of $80,000 beginning December 31, 2017.The lease is appropriately accounted for by Eastern as a finance lease.Eastern's incremental borrowing rate is 11%; however, they also know that the interest rate implicit in the lease payments is 10%.Eastern adheres to IFRS.
The present value of an annuity due for 6 years at 10% is 4.7908.
The present value of an annuity due for 6 years at 11% is 4.6959.
On its December 31, 2017 statement of financial position, Eastern should report a lease liability of (rounded to the nearest dollar)

Question

Quizplus · Accepted Answer

The correct answer is A. The lease liability is calculated as the present value of the lease payments, discounted at the implicit interest rate. The present value of the lease payments is $80,000 x 4.7908 = $383,264. The lease liability is then rounded to the nearest dollar, which is $383,264.