How to calculate the net present value of future minimum lease payments for finance leases?
The formula is quite simple – you just multiply the annual lease payment by the present value factor, and that results in the net present value of future minimum lease payments, which is recorded on the balance sheet as the lease liability (and ROU asset).
For example, let’s say the following information is available:
The NPV of future minimum lease payments would be $230,500. You would take the annual cash lease payment of $50,000, and multiply by the present value factor of 4.61 (always use the implicit rate if available).
The journal entry below illustrates how the company would record the asset and lease liability on the balance sheet on the date the lease starts:
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