Scher Co.leased a machine on December 31,2014.Annual payments under the lease are $110,000 (which includes $10,000 annual executory costs)and are due on December 31 each year,for a ten-year period.The first payment was made on December 31,2014,and the second payment was made on December 31,2015.According to the agreement,the lease payments are discounted at 10 percent over the lease term.Assume the present value of minimum lease payments at the inception of the lease and before the first annual payment was $615,000 and Scher appropriately classified the lease as a capital lease.What is the lease liability Scher should report in its December 31,2015,balance sheet?
A) $466,500
B) $515,000
C) $534,150
D) $576,500

Question

Quizplus · Accepted Answer

The lease liability Scher should report in its December 31, 2015, balance sheet is calculated by first adjusting the initial present value of minimum lease payments ($615,000) for the first lease payment (excluding executory costs, so $100,000), then applying the interest rate to the adjusted balance. The calculation is as follows: Initial liability of $615,000 - $100,000 payment = $515,000 remaining balance. Over the year, this balance accrues interest at 10%, so $515,000 * 10% = $51,500 in interest. The total liability before the second payment is $515,000 + $51,500 = $566,500. After the second payment of $100,000 (excluding executory costs), the liability is $566,500 - $100,000 = $466,500.

Scher CoLeased a Machine on December 31,2014