Question

On December 31, 2014, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2022. Equal annual payments of $300,000 are due on December 31 of each year, beginning with December 31, 2014. The lease is properly classified as a capital lease on Lang ‘s books. The present value at December 31, 2014 of the eight lease payments over the lease term discounted at 10% is $1,760,528. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2015 balance sheet is

a. $1,636,581.
b. $1,500,238.
c. $1,306,581.
d. $1,800,000.

Answer 1

The answer is: C) $1,306,581

Step-by-step explanation:

We must first deduct $300,000 (initial payment 31/12/2014) from the initial present value of the eight lease payments = $1,760,528 - $300,000 = $1,460,528. This is done because we are presenting the 31/12/2015 balance sheet.

Since the lease payments were discounted by 10%, to find the new present value (for 2015) we must multiply the present value (2014) by 110% = $1,460,528 x 110% = $1,606,581

Finally we must deduct the annual payment due form the present value for 2015:

• $1,606,581 - $300,000 = $1,306,581