Joshua Trucking leased a set of special-use trailers for six years at an annual rental of $30,000, payable at the end of each year. At the end of these six years the trailers are expected to be essentially worthless. Joshua Trucking's cost of financing is nine percent. What would be the change in Joshua Trucking's balance sheet as a result of leasing this equipment?

Question

Quizplus · Accepted Answer

The correct answer involves calculating the present value of the lease payments to determine the amount that should be recognized on the balance sheet for both the asset (Leased Trailers) and the liability (Lease Obligations). The present value of an annuity (lease payments) can be calculated using the formula for the present value of an annuity due to the payments being made at the end of each year. Given the annual rental of $30,000, a term of six years, and a discount rate of nine percent, the present value of these lease payments is approximately $134,578. This amount is added to both the asset and liability sides of the balance sheet, reflecting the obligation to make lease payments and the right to use the leased trailers.

Joshua Trucking Leased a Set of Special-Use Trailers for Six