On January 1, 2014, Mark Company leased equipment by signing a five-year lease that required five payments of $85,000 due on December 31 of each year. The equipment remains the property of the lessor at the end of the lease, and Mark does not guarantee any residual value. Using a rate of 11%, Mark capitalized the lease on January 1, 2014, in the amount of $314,152. What is the amount of the lease obligation on December 31, 2015?

Question

Quizplus · Accepted Answer

The lease obligation is the present value of the remaining lease payments discounted at the lessee's incremental borrowing rate (11%). We can use the formula:

Lease obligation = Remaining lease payments x PV factor

where PV factor = 1 / (1 + interest rate)^n

n = number of periods remaining

For December 31, 2015, there are three remaining lease payments of $85,000 each. So:

Lease obligation = 85,000 x (1/1.11)^1 + 85,000 x (1/1.11)^2 + 85,000 x (1/1.11)^3

Lease obligation = $207,717

Therefore, the correct answer choice is B.

On January 1, 2014, Mark Company Leased Equipment by Signing