Exercise 6-19 Lease payments [LO6-9] On June 30, 2016, Fly-By-Night Airlines lea

Question

Exercise 6-19 Lease payments [LO6-9] On June 30, 2016, Fly-By-Night Airlines leased a jumbo jet from Boeing Corporation. The terms of the lease require Fly-By-Night to make 20 annual payments of $100,000 on each June 30. Generally accepted accounting principles require this lease to be recorded as a liability for the present value of scheduled payments. Assume that a 7% interest rate properly reflects the time value of money in this situation. EVof $1, PV of $1, FVA of $1. PVA of $1. FVAD of $1 tables provided.) and PVAD of $1) (Use appropriate factor(s) from the Required: 1. At what amount should Fly-By-Night record the lease liability on June 30, 2016, assuming that the first payment will be made on June 30, 2017? Table or calculator function Payment n= PV-6/30/2016

Explanation / Answer

The following is the required calculation:

note: since the payments begin a year later, and are a uniform series of payments (i.e $100,000 every year), the series of payments is in the form of ordinary annuity payments.

note: (you can also find the PVA factor from the tables provided to you, since am not provided with tables, am doing the formula method).

(in the PVA of $1 table,look for i 7% and n=20 years)

formula for present value of annuity factor:

=>[ 1 - (1+r)^(-n)]/r

here,

r = 7% =>0.07.

n = 20 years.

=>[1 - (1.07)^(-20)]/0.07

=>[0.741581/0.07]

=>10.5940143.

now,

PV = $100,000 * 10.5940143

=>$1,059,401.43...........(approximately, there may be a slight variance with the PVA of $1 table due to rounding off of PVA factor).

Table or calculator function PVA of $1 Payment : $100,000 n = 20 years i = 7% PV - 6/30/ 2016 $1,059,401.43

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