Question

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $19 million. This noncancelable lease had the following terms: Lease payments: $3,060,451 semiannually; first payment at January 1, 2021; remaining payments at June 30 and December 31 each year through June 30, 2025. 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: 7% semiannually. Fair value of the computers at January 1, 2021: $23 million. What is the outstanding balance of the lease liability in Lone Star's June 30, 2021, balance sheet? (Round your answer to the nearest whole dollar.) Multiple Choice $18,274,866. $18,074,875. $23,000,000. None of these answer choices is correct.

Answer 1

We take this as the correct option:

$18,274,866

Step-by-step explanation:

Present Value of the Lease Payments:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 3,060,451

time 10

rate 0.07

`3060451 * (1-(1+0.07)^(-10) )/(0.07) = PV\\`

PV $23,000,000.0511

Now, we build the lease schedule up to the first two payment: