Exercise 6-20 Lease payments; solve for unknown interest rate [LO6-8, 6-9)] On M

Question

Exercise 6-20 Lease payments; solve for unknown interest rate [LO6-8, 6-9)] On March 31, 2016, Southwest Gas leased equipment from a supplier and agreed to pay $320,000 annually for 20 years beginning March 31, 2017. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Southwest recorded a $3,141,807 lease liability. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Determine the interest rate implicit in the lease agreement. Present value of lease n= Lease payments

Explanation / Answer

PV of Lease Payment          3,141,807 n = 20 Years i = 8% Annual Lease Payment              320,000 PV annuity = $3,141,807 / 320,000 = 9.818147 Finding the PV annuity in the PV of Annuity factors where n = 20, i = 8% (approx.).

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