A company signed an operating lease agreement to use office space for 5 years. The company took possession and began to use the building on January 1, Year 1. Annual rent of $24,000 is due on the first day of each year. Assuming an implicit interest rate in the lease of 6%, the present value of the lease payments at the inception of the lease is $107,163. On December 31, Year 3, what amount should the company report as the lease liability balance on its balance sheet

$22,642

Explanation:

The amount of lease liability that will be reported in the balance sheet on December 31 year 3 can be calculated as follows

           Opening    Cash payment     Outstanding   Interest rate   Closing

Year 1    $107,163      $24,000            $83,163           $4990          $88,153

Year 2    $88,153       $24,000           $64,153           $3,849         $68,002

Year 3    $68,002      $24,000           $44,002         $2,640         $46,642

Year 4   $46,642       $24,000           $22,642         $1,358           $24,000

Year 5    $24,000     $24,000                  -                   -                       -        

Total liability = $46,642

Non curret = $46,642 - $24,000 =$22,642

The amount of lease liability that will be reported in the balance sheet on 31 December year 3 is $22,642

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