Question

Oak Co. leased equipment for its entire 9‐year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, 20X4 and $50,000 annually on each December 31 for the next 8 years. The present value on December 31, 20X4 of the nine lease payments over the lease term, using the rate implicit in the lease, which Oak knows to be 10%, was $316,500. The December 31, 20X4 present value of the lease payments using Oak's incremental borrowing rate of 12% was $298,500. Oak made a timely second lease payment. What amount should Oak report as capital lease liability in its December 31, 20X5 balance sheet?\

Answer 1

$243,150

Step-by-step explanation:

The lessee uses the lower known rates at 10% .

Then we calculate the lease liability balance immediately after the first payment (at the beginning)

$316,500 - $50,000 = $266,500 .

There will be no interest on the first payment because it is paid immediately. The entry for the December 31, 2005 payment is therefore:

Lease liability 23,350

Interest expense 0.10 ×$266,500 = 26,650

Cash 50,000

The ending lease liability balance = Lease liability(at inception) - Lease liability on 31/12/05

$266,500 - $23,350 = $243,150