CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity
A lessee signs a 3-year lease with annual payments of 10,000 at each year-end. The discount rate is 10%, and the present value of the payments is 24,869. At the end of Year 1, after the first payment, the lease liability is closest to:
The lease liability after the first payment is about 17,356. Interest of 2,487 accrues on the opening 24,869, then the 10,000 payment is deducted. This equals the present value of the two remaining payments at 10%.
- A14,869
- B17,356Correct
- C22,356
Explanation
Interest in Year 1 = 24,869 x 10% = 2,487. Liability = 24,869 + 2,487 - 10,000 = 17,356. Check: PV of two remaining payments = 10,000 x 1.7355 = 17,355. The 22,356 option deducts only the interest portion; 14,869 deducts payment without interest.
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