On January 1, 2016, Kathy Corp. leased equipment by signing a five-year lease that required five payments of $60,000 due on December 31 of each year. Kathy has a 9% cost of capital and capitalized the lease on January 1,
2016, in the amount of $233,379. As of December 31, 2016, what amount is reported as the current portion of the lease obligation?

Question

Quizplus · Accepted Answer

The current portion of the lease obligation is the portion of the lease liability that will be paid within the next year. To find this, we first need to calculate the interest expense for the year, which is the capitalized amount ($233,379) multiplied by the interest rate (9%). This gives us an interest expense of $20,004.11 ($233,379 * 9%). The lease payment for the year is $60,000, so the reduction in the lease liability is the payment minus the interest expense, which is $39,995.89 ($60,000 - $20,004.11). The current portion is the next payment ($60,000) minus this reduction, which gives us $20,004.11 as the amount that will be recognized as interest expense in the next period. However, the correct calculation for the current portion directly involves the reduction in the lease liability, which is the part of the next payment that goes towards reducing the principal. Given the options and the process, the correct answer reflects the amount that will be paid towards the principal in the next year, which is closest to the calculated reduction in the lease liability. The correct calculation involves understanding that the current portion is the part of the next payment that reduces the principal, which is not directly given by any of the calculations above. The correct answer (C) $42,506, is derived from the lease amortization schedule, which would show the principal portion of the next payment. My explanation mistakenly focused on the interest and reduction for the first year without correctly identifying the principal portion of the next payment.