Question

technoid incorporated sells computer systems. technoid leases computers to lone star company on january 1, 2024. the manufacturing cost of the computers was $19 million. this noncancelable lease had the following terms: lease payments: $2,836,767 semiannually; first payment on january 1, 2024; remaining payments on june 30 and december 31 each year through june 30, 2028. lease term: 5 years (10 semiannual payments). no residual value; no purchase option. economic life of equipment: 5 years. implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. fair value of the computers on january 1, 2024: $23 million. what is the outstanding balance of the lease liability in lone star's balance sheet on june 30, 2024?

Answer 1

The outstanding balance of the lease liability on Lone Star's balance sheet on June 30, 2024, is $13,689,544.

Step-by-step explanation:

The outstanding balance of the lease liability on Lone Star's balance sheet on June 30, 2024, can be calculated by subtracting the lease payments made up to that date from the initial lease liability.

Since the lease is for 5 years with 10 semiannual payments, we need to determine the lease liability for each payment. The lease liability is the present value of the lease payments discounted at the incremental borrowing rate of 5% semiannually.

To calculate the outstanding balance, we subtract the lease payments made up to June 30, 2024, from the initial lease liability:

Initial lease liability = $2,836,767 x (1 - (1 / (1 + 0.05)^10)) / 0.05 = $19,363,078

Lease payment made on January 1, 2024 = $2,836,767

Lease payment made on June 30, 2024 = $2,836,767

Outstanding balance on June 30, 2024 = Initial lease liability - (lease payment made on January 1, 2024 + lease payment made on June 30, 2024) = $19,363,078 - ($2,836,767 + $2,836,767) = $13,689,544