On December 31,2014,Endive Company leased a machine under a capital lease for a period of ten years,contracting to pay $100,000 on signing the lease and $100,000 annually on December 31 of the next nine years.The present value at December 31,2014,of the ten lease payments over the lease term discounted at 10 percent was $676,000.At December 31,2015,Endive's total capital lease liability is
A) $486,000.
B) $518,000.
C) $533,600.
D) $607,960.

Question

Quizplus · Accepted Answer

The total capital lease liability initially is $676,000. After the first payment of $100,000 at the beginning of the lease term, the liability becomes $576,000. Over the year, this amount accrues interest at 10%, adding $57,600 (10% of $576,000) to the liability. Therefore, before the payment on December 31, 2015, the liability is $633,600. The payment of $100,000 on December 31, 2015, reduces this to $533,600.

On December 31,2014,Endive Company Leased a Machine Under a Capital