N Corp. entered into a nine-year finance lease on a warehouse on December 31, 2018. Lease payments of $26,000, which includes maintenance services of $1,000, are due annually, beginning on December 31, 2019, and every December 31 thereafter. N does not know the interest rate implicit in the lease; N's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should N report as recorded lease liability at December 31, 2018?

Question

Quizplus · Accepted Answer

The recorded lease liability should be the annual lease payments less the nonlease component (maintenance), times the present value factor for an ordinary annuity of $1 for nine years at 9%. The calculation would be: ($26,000 - 1,000) × 6.0 = $150,000. The maintenance fees are a period cost and should be charged to expense.

N Corp Entered into a Nine-Year Finance Lease on a Warehouse