Index Laboratories is considering leasing a thermoplastic molder. The lease would require 7 beginning-of-the-year payments of $122,000 each. If Index capitalizes this lease for financial reporting purposes at a 12% rate, what asset amount will be reported initially on its balance sheet?
A) $623,625
B) $969,046
C) $556,808
D) $854,000

Question

Quizplus · Accepted Answer

The initial asset amount reported on the balance sheet for a capitalized lease is the present value of the lease payments. Using the formula for the present value of an annuity due (since payments are at the beginning of each period), with 7 payments of $122,000 each at a 12% interest rate, the calculation results in approximately $623,625.

Index Laboratories Is Considering Leasing a Thermoplastic Molder