Chapter 5, Problem 5.7DMP

(1)

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

To determine: The effective interest rate the company used to determine the lease liability assuming that lease payments are made at the end of each fiscal year.

(2)

To determine

Present value of an annuity due:

For the present value of an annuity due, the same formula of an ordinary annuity is used expect the amount of immediate cash flow, which is added to the present value of the future periodic cash flows which are remaining.

To determine: The effective interest rate the company used to determine the lease liability assuming that lease payments are made at the beginning of each fiscal year.