Superbyte Corporation sells photographic equipment. Superbyte leases equipment to Laguna Madre Company on January 1 of the current year. The cost to manufacture the equipment was $12 million. The lease agreement between SuperByte and Laguna Madre had the follow terms: 1. The lease is noncancellable.
2) The lease has no residual value or bargain purchase option.
3) The lease term is 8 years; payments are made semiannually.
4) Depreciation is recorded each December 31 using the straight-line approach.
5) The economic life of the equipment is 8 years.
6) The lessee's incremental borrowing rate and the implicit interest rate are both 8% annually.
7) The lease payments are $1,493,617 semiannually. The first payment is due at the inception of the lease; subsequent payments are made every July 1 and January 1.
8) The fair value of the equipment at the inception of the lease is $16,000,000.
What is the net book value of the lease liability in Laguna Madre's balance sheet on June 30 of the current year?
A) $11,970,536
B) $15,777,260
C) $10,455,319
D) $14,506,383

Question

Quizplus · Accepted Answer

The net book value of the lease liability is calculated by taking the present value of the remaining lease payments. The lease is an 8-year lease with semiannual payments of $1,493,617. The first payment is made at the inception, so there are 15 remaining payments. Using the implicit interest rate of 8% annually (or 4% semiannually), the present value of these 15 payments is $15,777,260.

Superbyte Corporation Sells Photographic Equipment