CDE leased equipment from HIJ on December 31, 2014, for a 10-year period (also the useful life of the asset).Equal annual payments under the lease are $50,000 and are due on December 31 of each year.The first payment was made on December 31, 2014, and the second payment was made on the next due date.The present value at December 31, 2014, of the minimum lease payments over the lease term discounted at 10 percent (the implicit rate computed by HIJ and known by CDE)was $338,000.CDE's incremental borrowing rate was 12 percent at December 31, 2014.The lease is appropriately accounted for as a finance lease by CDE.What should be the balance in CDE's liability under finance lease account at December 31, 2015?

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Quizplus · Accepted Answer

The initial liability is the present value of the lease payments, which is $338,000. After the first payment of $50,000, the liability is reduced to $288,000. Interest for 2015 at 10% on $288,000 is $28,800. The second payment of $50,000 reduces the liability to $266,800.

CDE Leased Equipment from HIJ on December 31, 2014, for a 10-Year