On December 31, 2020, 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, 2020. 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, 2020 statement of financial position, Eastern should report a lease liability of (rounded to the nearest dollar)
A) $ 303,264.
B) $ 340,000.
C) $ 375,672.
D) $ 383,264.

Question

Quizplus · Accepted Answer

The present value of the lease payments is $383,264 ($80,000 x 4.7908). The lease liability is the present value of the lease payments multiplied by the implicit interest rate, which is 10%. Therefore, the lease liability is $383,264 x 10% = $38,326. The lease liability is rounded to the nearest dollar, which is $38,326.