Walker, Inc., leased a machine from Holden Company. The lease term was for a five-year period beginning January 1, 2011. Equal annual lease payments of $3,000 are due on December 31 of each year. The implicit rate of the lease is 10% and is known to Walker. Walker has properly applied the lease capitalization criteria and as a result, accounts for the lease as a capital lease. The first payment under the lease was made on December 31, 2011 as scheduled.
How much should Walker classify as the current portion of the lease liability at December 31, 2011?
A) $2,049
B) $7.460
C) $3,000
D) $9,509

Question

Quizplus · Accepted Answer

The current portion of the lease liability is the principal portion of the lease payment due within the next year. The first payment is entirely interest, so the current portion is the principal reduction from the second payment. The present value of the lease payments is calculated, and the interest for the first year is subtracted from the first payment to find the principal reduction.