Jordan Co. leased a machine on December 31, 2011. Annual payments under the lease are $110,000 (which includes $10,000 annual executory costs) and are due on December 31 each year, for a ten-year period. The first payment was made on December 31, 2011, and the second payment was made on December 31, 2012. According to the agreement, the lease payments are discounted at 10 percent over the lease term. Assume the present value of minimum lease payments at the inception of the lease and before the first annual payment was $615,000 and Jordan appropriately classified the lease as a capital lease. What is the lease liability Jordan should report in its December 31, 2012, balance sheet?

Question

Quizplus · Accepted Answer

The lease liability is calculated by taking the present value of the remaining lease payments after the first two payments have been made. The initial liability was $615,000. After the first payment of $100,000 (excluding executory costs), the liability is reduced to $515,000. The second payment further reduces the liability to $466,500.

Jordan Co Leased a Machine on December 31, 2011