CFA Practice Question

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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?

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.

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
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
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