Epson Distributing leased a machine for a period of eight years, contracting to pay $200,000 at the beginning of the lease term on December 31, 2011, and $200,000 annually on December 31 for each of the next seven years. The present value of the eight rent payments over the lease term, appropriately discounted at 10 percent, is $1,174,000. On its December 31, 2012, balance sheet, Epson should report a liability under capital lease of
A) $871,400.
B) $876,600.
C) $974,000.
D) $1,091,400.

Question

Quizplus · Accepted Answer

The initial lease liability is the present value of the remaining lease payments. After the first payment of $200,000 on December 31, 2011, the present value of the remaining seven payments is $1,174,000 - $200,000 = $974,000. After the second payment on December 31, 2012, the liability is reduced by the principal portion of that payment, which is $974,000 - ($200,000 - interest for 2012). The interest for 2012 is $974,000 * 10% = $97,400, so the principal reduction is $200,000 - $97,400 = $102,600. Therefore, the liability is $974,000 - $102,600 = $871,400.

Epson Distributing Leased a Machine for a Period of Eight