On January 1, 2014, Rhyme Co. leased equipment by signing a six-year lease that required six payments of $30,000 due on January 1 of each year with the first payment due January 1, 2014. The equipment remains the property of the lessor at the end of the lease, and Rhyme does not guarantee any residual value. Using an 8% cost of capital, Rhyme capitalized the lease on January 1, 2014, in the amount of $149,781. What is the total amount of lease liability (including interest) Rhyme should report as of December 31, 2015?

Question

Quizplus · Accepted Answer

To calculate the lease liability as of December 31, 2015, we need to calculate the present value of the remaining lease payments as of that date, using the 8% cost of capital.

Here is a table of the payments:

| Year | Payment | PV Factor (8%) | Present Value |
|------|---------|---------------|---------------|
| 2014 | $30,000 | 0.9259        | $27,777        |
| 2015 | $30,000 | 0.8573        | $25,719        |
| 2016 | $30,000 | 0.7938        | $23,814        |
| 2017 | $30,000 | 0.7350        | $22,049        |
| 2018 | $30,000 | 0.6806        | $20,413        |
| 2019 | $30,000 | 0.6302        | $18,901        |

The present value of the remaining lease payments as of December 31, 2015, is the sum of the present values of the last four payments, which is $87,186.

To this amount, we need to add the capitalized lease liability as of January 1, 2014, which is $149,781.

So the total lease liability as of December 31, 2015, is $236,967, which is closest to answer choice B, $107,313.