Stockton, Inc. leased machinery with a fair value of $250,000 from Layton Machine Co. on December 31, 2011. The contract is a six-year noncancelable lease with an implicit interest rate of 10 percent. The lease requires annual payments of $50,000 beginning December 31, 2011. Stockton appropriately accounted for the lease as a capital lease. Stockton's incremental borrowing rate is 12 percent. Assuming the present value of an annuity due of 1 for 6 years at 10 percent is 4.7908 and the present value of an annuity due of 1 for 6 years at 12 percent is 4.6048, what is the lease liability that Stockton should report on the balance sheet at December 31, 2011?

Question

Quizplus · Accepted Answer

The lease liability is the present value of the lease payments discounted at the implicit interest rate. The present value of the lease payments is $239,540 ($50,000 x 4.7908).