Which costs are excluded when calculating the present value for a capital lease obligation?

Which costs are excluded when calculating the present value for a capital lease obligation?

• A. Executory costs
• B. Principal payments
• C. Maintenance fees
• D. Tax effects

Answer: (A)

In a capital (finance) lease, the lease liability is the present value of the minimum lease payments. These payments consist of fixed payments, any amounts guaranteed for the lessee to pay, and other specified payments the lessee is obligated to make over the lease term (such as a bargain purchase option or penalties for termination). Costs that are not part of those minimum lease payments—executory costs—are not included in the calculation. Executory costs are ongoing operating costs to maintain and use the asset, like maintenance, upkeep, taxes, and insurance, that the lessee pays separately rather than as part of the lease payments. Because these are not part of the minimum lease payments, they are excluded from the present value calculation. Maintenance fees fall into that category of executory costs, so they’re excluded along with taxes. Principal payments are included in the minimum lease payments, which is why they are part of the present value.

In a capital (finance) lease, the lease liability is the present value of the minimum lease payments. These payments consist of fixed payments, any amounts guaranteed for the lessee to pay, and other specified payments the lessee is obligated to make over the lease term (such as a bargain purchase option or penalties for termination). Costs that are not part of those minimum lease payments—executory costs—are not included in the calculation. Executory costs are ongoing operating costs to maintain and use the asset, like maintenance, upkeep, taxes, and insurance, that the lessee pays separately rather than as part of the lease payments. Because these are not part of the minimum lease payments, they are excluded from the present value calculation. Maintenance fees fall into that category of executory costs, so they’re excluded along with taxes. Principal payments are included in the minimum lease payments, which is why they are part of the present value.