Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $6,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 10%. Initial direct costs of $1,100 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $41,608. Collection of all lease payments is reasonably assured. What is the reduction in the lease liability recorded with the first and second lease payments, respectively?
A) $6,000; $2,545
B) $4,165; $4,165
C) $36,499; $2,350
D) $4,055; $3,650

Question

Quizplus · Accepted Answer

The correct answer is A because the reduction in the lease liability recorded with the first and second lease payments, respectively, is $6,000 and $2,545. The lease liability is initially recorded at the present value of the lease payments, which is $41,608. The first lease payment reduces the lease liability by $6,000, and the second lease payment reduces the lease liability by $2,545.

Nace Manufacturing Company Leased a Piece of Nonspecialized Equipment for Use