Barnum, Inc., leased equipment from Baily Supply on December 31, 2011. The lease term is for the 10-year period expiring December 30, 2021. The useful life of the leased asset is 10 years. Equal annual payments under the lease are $100,000 due on December 31 of each year. The first payment was made on December 31, 2011. Barnum's incremental borrowing rate was 12% at December 31, 2011. Baily's implicit rate for the lease is 10% and is known by Barnum. Barnum appropriately accounts for the lease as a capital lease.
What is the balance in Barnum's "Liability Under Lease Agreements" account at December 31, 2012?

Question

Quizplus · Accepted Answer

The lease is a capital lease, and the present value of the lease payments is calculated using the implicit rate of 10%. The initial liability is the present value of the remaining 9 payments of $100,000 each, discounted at 10%. The balance at December 31, 2012, is the initial liability minus the principal portion of the first payment.