Ira Bates Corp. entered into a 9-year finance lease on a warehouse on December 31, 2018. Lease payments of $39,000, which includes maintenance service of $1,500, are due annually, beginning on December 31, 2019, and every December 31 thereafter. The interest rate implicit in the lease is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Bates record as the lease payable at December 31, 2018?
A) $225,000
B) $234,000
C) $337,500
D) $351,000

Question

Quizplus · Accepted Answer

The lease payable should be recorded as 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: ($39,000 - 1,500) × 6.0 = $225,000. The maintenance should be charged to expense each year.