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

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, a 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. $ 3,141,807 20 8% 320,000 Present value of lease n= Lease payments

Explanation / Answer

PV factor for lease = 3141807/320000= 9.81815 The PV factor 9.81815 for 20 years is closest to 8% Present value of lease = 3141807 n = 20 I = 8% Lease payments = 320000

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