- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 8. Topics in Long-Term Liabilities and Equity
- Subject 3. Accounting and Reporting by the Lessee

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**CFA Practice Question**

Eagle Company leased some factory equipment from McNabb Leasing Inc. with annual lease payments of $120,000 over a five-year period. The lease payment includes $5,000 in executory costs. Eagle accounts for the lease as a capital lease using a discount rate of 8%. The present value of $1 for 5 periods at 8% is .68058. The present value of an annuity of $1 for 5 periods at 8% is 3.99271. At what amount should the leased asset be recorded on Eagle's books?

B. $391,334

C. $459,162

A. $0

B. $391,334

C. $459,162

Correct Answer: C

The lease payment, net of executory costs, is multiplied by the present value of an annuity of $1 for 5 periods. The computation is $115,000 * 3.99271 = $459,162.

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**User Contributed Comments**
9

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

isida |
executory costs are not included in calculating the PV of the lease payments!!! |

skonko |
why are executory costs excluded in the calculation? |

mtcfa |
What exactly are executory costs? |

wuyi |
Executory Cost: utilities, insurance, maintenance, and taxes included in the periodic payment, but not for the 'leasing' or rental expense. Such costs paid separately to the lessor or to another party, are not executory costs. |

o123 |
...and it seems these executory costs occur in every period aswell. |

steved333 |
They do occur, but they are separate from the actual lease payment. They would be accounted for in addition to the pmts, and they are a flat pmt, so there is no imputed interest on the executory costs, only the capitalized lease pmts. |

Gpcurve |
n=5 i=8 PMT=115000 PV |

johntan1979 |
So where do executory costs go on Eagle's books? |

Shaan23 |
I made this a bit trickier. Thought the first lease payment was at time = 0 --- that's how the textbook question was and how it would be in most real life scenerios. Annuity due = Annuity Immediate * (1 + i) if the question was like that |