On December 31, 2014, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2022. Equal annual payments of $300,000 are due on December 31 of each year, beginning with December 31, 2014. The lease is properly classified as a capital lease on Lang 's books. The present value at December 31, 2014 of the eight lease payments over the lease term discounted at 10% is $1,760,528. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2015 balance sheet is
A) $1,636,581.
B) $1,500,238.
C) $1,306,581.
D) $1,800,000.

Question

Quizplus · Accepted Answer

The annual payment of $300,000 for an eight-year period gives us a total lease obligation of $2,400,000 ($300,000 x 8). The present value of this obligation at December 31, 2014 is $1,760,528, which means that the interest rate implicit in the lease is approximately 10%.

To calculate the amount reported as the total obligation under capital leases on Lang Corporation's December 31, 2015 balance sheet, we need to determine the amount of lease payments made in 2015. Since the lease payments are due on December 31 of each year, Lang Corporation would have made one payment of $300,000 on December 31, 2015.

Using the amortization schedule for a capital lease, we can calculate the interest and principal portions of this payment. The interest portion is calculated as the beginning balance of the lease obligation ($1,760,528) multiplied by the interest rate implicit in the lease (10%), which equals $176,053. The principal portion is the lease payment minus the interest portion, which equals $123,947 ($300,000 - $176,053).

To calculate the total obligation under capital leases on Lang Corporation's December 31, 2015 balance sheet, we need to subtract the principal portion of the 2015 lease payment from the beginning lease obligation:

Beginning lease obligation: $1,760,528 
Less: Principal portion of 2015 lease payment ($123,947) 
Total obligation under capital leases on December 31, 2015 balance sheet: $1,636,581

Therefore, the answer is choice C.

On December 31, 2014, Lang Corporation Leased a Ship from Fort