Brooke Distributing leased a machine for a period of eight years,contracting to pay $200,000 at the beginning of the lease term on December 31,2014,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 31,2015,balance sheet,Brooke 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 liability is the present value of the lease payments, which is $1,174,000. After the first payment of $200,000 on December 31, 2014, the liability is reduced to $974,000. By December 31, 2015, another payment of $200,000 is made, reducing the liability further. The interest for the year on the remaining balance is added back, resulting in a liability of $871,400.

Brooke Distributing Leased a Machine for a Period of Eight