- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 8. Accounting and Reporting by the Lessee

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**CFA Practice Question**

Clifton Company leased a computer from Jan Corporation on January 1, 2015, for a 10-year period, the useful life of the asset. Equal rental payments of $5,000 are due on January 1 of each year. The first payment was made on January 1, 2015. The present value of the minimum lease payments over the lease term discounted at 10% was $33,795. The balance in Clifton's liability account (including accrued interest) on December 31, 2015 should be ______.

A. $27,256

B. $30,392

C. $31,675

**Explanation:**Lease liability (December 31, 2015):

= Acquisition cost - First lease payment interest for 2010

= $33,795 - $5,000 + ([$33,795 - $5,000] x 10%)

= $28,795 + $2,880

= $31,675

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**User Contributed Comments**
20

User |
Comment |
---|---|

shasha |
now i understand that for annuity due, first payment of $5,000 is deducted from pv to reach an acquisition cost as the beginning lease liability, then next payment of $5,000 is treated as the FIRST lease payment. |

BZZNone |
Acquisition cost is $33,795, which is PV of annuity due. First payment of $5000 is on 01/01/2010 and reduces balance to $28,795. Second payment is on 12/31/2010 and includes interest $33,795 - $5,000 = $2880 and amortization $5,000 - $2,880 = $2,120. So balance is $28,795 - $2,120 = $26,675. |

shasha |
BZZNone: 31,675 is the correct answer. Although lease pmt of $5,000 on Jan 1 '00 was paid-out that day, on bookkeeping, its interest part 10%*(33,795-5,000)= $2,880 was accrued on the B/S of Dec. 31 '00, by which day the next lease pmt of $5,000 hadn't been paid yet. (NB. "2nd" pmt was on 1/1/01, not 12/31/00)! I wanted to say on my last post that when we calculate the accrued interest, we use 33,795-5,000 as beginning lease liability instead of 33,795. |

KSB1 |
The first time I tried this question, I did what BZZNone did and got his answer. I then tried this method: $33795 x 10% = $3379.50 (Interest Payment) $5000 - $3379.5 = $1,620.50 (Reduction in Lease Liability) Repeating this process for the next payment gives us: $32174.50 x 10% = $3217.45 (Interest Pmt) $5000 - $3217.45 = $1782.55 (Reduction in Lease Liability) Deducting $1782.55 from $32174.50 gives us $30,392 The only way I can explain 31,675 to myself is if I assume that the first payment went directly towards reducing the lease liability and nothing towards interest. Is this correct? |

kalps |
The correct answer is 100% 31,675! look at what sasha did in his/er second explanation and you will see that it is correct - this is a common question in CPA examinations |

cutehinano |
so basically the answer should be lease liab + interest payable on dec 31, 2010. |

armanaziz |
Am I correct to say that the first lease payment doesn't have any interest component in it because no time has elapsed since entering into the lease contract? |

chuong |
N=1, I/Y=10 PMT=5,000, PV=33,795 then FV=31,674.50 so that C is correct (remember to set the calculator to BGN payment mode not END mode) |

danlan |
In Chuong's post, should set PMT=-5000. Or simply (31674.5-5000)*1.1=31675 |

Shelton |
BGN: n=1, I/Y=10, PV=-33795 => FV=31674.5 |

wink44 |
How I did it... BGN n=9 i/y=10 pmt=(5000) PV=31674.5 |

ml42085 |
BGN n=9 is the easiest way... |

danrow |
Actually I think is simplier than it looks. The 2879.5 is the accrued interest during the year (the first 5000 dollars reduce the amount of the liability to 28,795, hence the interest of 10% applies to that total. The question asks the liablity account + ACCRUED INTEREST. Those 2879.5 are the accrued interest applied. |

Nando1 |
The first $5,000 pmt has NO interest component since it is an annuity due. |

homersimpson |
Thanks wink44! You rock! |

jayj001 |
[33795-5000] * 1.1 = 31675 |

Mikehuynh |
Good job, wink44! |

Mikehuynh |
Annuity due of lease pmt with N=9. |

davcer |
annuity due n=9 (1- (1/1.1exp9))/.1 =5.759 then 5000*5.759= 28795 this is the pv of regular annuity, annuity due is 28795*1.1= 31674.7 |

birdperson |
I'm with @Wink44 |