Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $77,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,900 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,900, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,200. Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment?

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Quizplus · Accepted Answer

The lease liability is the present value of the lease payments, which is $47,821. This is calculated as follows:PV = $10,900 + ($10,900 x 4.623)PV = $10,900 + $50,221PV = $61,121Less: Initial direct costsLease liability = $61,121 - $1,200Lease liability = $47,821

Leewin Brokerage Enters into a Lease Agreement with Bumble Motors