On March 31, 2021, Southwest Gas leased equipment from a supplier and agreed to pay $370,000 annually for 20 years beginning March 31, 2022. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Southwest recorded a $4,611,018 lease liability.

Required:

Determine the interest rate implicit in the lease agreement.

Question

Business

Zavala

3 September, 12:09

On March 31, 2021, Southwest Gas leased equipment from a supplier and agreed to pay $370,000 annually for 20 years beginning March 31, 2022. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Southwest recorded a $4,611,018 lease liability.

Required:

Determine the interest rate implicit in the lease agreement.

+3

Answers (1)

Know the Answer?

Elaine Rose · Answer 1

Present value of annuity factor = 4,611,018/370,000 = 12.46

The we look at the present value table of annuity where n=20 and find annuity factor of 12.46. In the case of i=5% the annuity factor is 12.46. So implicit rate in the lease agreement in 5%.