Chapter 5, Problem 5.20E

Lease payments

• LO6–9

On June 30, 2018, Fly-By-Night Airlines leased a jumbo jet from Boeing Corporation. The terms of the lease require Fly- By-Night to make 20 annual payments of $400,000 on each June 30. Generally accepted accounting principles require this lease to be recorded as a liability for the present value of scheduled payments. Assume that a 7% interest rate properly reflects the time value of money in this situation.

Required:

1. 1. At what amount should Fly-By-Night record the lease liability on June 30, 2018, assuming that the first payment will be made on June 30, 2019?
2. 2. At what amount should Fly-By-Night record the lease liability on June 30, 2018, before any payments are made, assuming that the first payment will be made on June 30, 2018?