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Dear Sir,
In one of your question on lease as follows:
On 1 January 2015, Plum entered into a five year lease of machinery. The machinery has a useful life of six years. The annual lease payments are $5,000 per annum, with the first payment made on 1 January 2015. To obtain the lease Plum incurs initial direct costs of $1,000 in relation to the arrangement of the lease but the lessor agrees to reimburse Pear $500 towards the costs of the lease.
The rate implicit in the lease is 5%. The present value of the minimum lease payments is $22,730.
Demonstrate how the lease will be accounted in the financial statements over the five year period.How were you able to obtain minimum lease payments of $22730 as $5000 x 4.325 = $21625.
Thanks
Hi,
The 4.325 is the annuity factor for the length of the lease at 5%. The annuity factor will be 1 + AF 1-5 @ 5%.
Thanks
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