Sanborn,Inc. ,leased equipment from Chase Supply on December 31,2014.The lease term is for the 10-year period expiring December 30,2021.The useful life of the leased asset is 10 years.Equal annual payments under the lease are $100,000 due on December 31 of each year.The first payment was made on December 31,2014.Sanborn's incremental borrowing rate was 12% at December 31,2014.Chase's implicit rate for the lease is 10% and is known by Sanborn.Sanborn appropriately accounts for the lease as a capital lease. What is the balance in Sanborn's "Liability Under Lease Agreements" account at December 31,2015?

Question

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The balance in Sanborn's "Liability Under Lease Agreements" account at December 31, 2015, is calculated by first determining the present value of the lease payments at the inception of the lease, then subtracting the lease payment made at the end of 2014, and finally adjusting for the interest accrued during 2015. Since Sanborn knows Chase's implicit rate (10%) and it is lower than Sanborn's incremental borrowing rate (12%), the implicit rate of 10% is used for the calculation. The present value of the lease payments (an annuity due since the first payment is made at the beginning of the lease term) is calculated using the 10% rate. After the first payment is made, the remaining balance is then adjusted for interest accrued over one year. The correct answer reflects the balance after these adjustments.