Problem 11-7

Given:
Annual Rental – First 3 Years = 300,000
Annual Rental (Amendment) – First 5 Years = 400,000
Implicit Interest Rate = 10%
PV of an Ordinary Annuity of 1 at 10% for 3 Periods = 2.49
PV of an Ordinary Annuity of 1 at 10% for 5 Periods = 3.79
PV of 10% for 3 Periods = 0.75

Required: Answers:
1. Lease Liability – 1/1/2020 1,884,000 (C)
2. Interest Expense – 2020 188,400 (A)
3. Interest Expense – 2023 151,460 (A)
4. Lease Liability – 12/31/2023 1,266,064 (B)

Solution:
PV for next 5 years (400,000*3.79) 1,516,000
Multiply by PV of 1 at 10% for 3 periods 0.75
Present Value – 1/1/2020 1,137,000
PV for 1st 3 years (300,000*2.49) 747,000
Lease Liability – 1/1/2020 1,884,000

Date Payment 10% Interest Principal Present Value

1/1/2020 P 1,884,000
12/31/2020 P 300,000 P 188,400 P 111,600 1,772,400
12/31/2021 300,000 177,240 122,760 1,649,640
12/31/2022 300,000 164,964 135,036 1,514,604
12/31/2023 400,000 151,460 248,540 1,266,064

Interest Expense – 2020 (10% of PV on 1/1/2020) 188,400

Interest Expense – 2023 (10% of PV on 12/31/2022) 151,460
Lease Liability – 12/31/2023 (PV on 12/31/2022 minus Principal
On 12/31/2023 = 1,514,604 – 248,540) 1,266,064

Problem 11-7

Given: (Too many, just refer to book)

Required: Answers:
1. Lease Liability – 12/31/2021

1,491,540 (C)
2. New Lease Liability – 1/1/2022 4,069,680 (D)
3. Right of Use Asset – 1/1/2022 1,364,400 (A)
Solution:
PV of lease Payment (500,000*3.79) 2,274,000

Date Payment 10% Interest Principal Present Value

1/1/2020 P 2,274,000
12/31/2020 P 600,000 P 227,400 P 372,600 1,901,400
12/31/2021 600,000 190,140 409,860 1,491,540

Accumulated Depreciation (2,274,000/5) = 454,800

PV – 1/1/22 (600,000*2.58) 1,548,000

Annual Rental Payable (800,000*3.99*0.79) 2,521,680
Total PV on 1/1/22 4,069,680

Right of Use Asset – 1/1/20 2,274,000

Less: Accumulated Depreciation (454,800*2) 909,600
Right of Use Asset 1,364,400