On January 1, 2004, Digital, Inc. leased heavy machinery from Young Leasing Comp

Question

 On January 1, 2004, Digital, Inc. leased heavy machinery from Young Leasing Company. The terms of the lease require annual payments of $20,000 for twenty years beginning on December 31, 2004. The interest rate on the lease is 10%. Assume the lease qualifies as a capital lease. 

 1. Calculate the balance in the lease liability account on December 31, 2005 after the second lease payment is made.  

 2. Calculate the amount of the lease liability at December 31, 2005 that would be classified as a current liability. 

 On January 1, 2004, Digital, Inc. leased heavy machinery from Young Leasing Company. The terms of the lease require annual payments of $20,000 for twenty years beginning on December 31, 2004. The interest rate on the lease is 10%. Assume the lease qualifies as a capital lease. 

 1. Calculate the balance in the lease liability account on December 31, 2005 after the second lease payment is made.  

 2. Calculate the amount of the lease liability at December 31, 2005 that would be classified as a current liability. 

Explanation / Answer

Answer:

Present value of lease payment as on Dec. 31, 2004:

= Annual Lease payment * PVAF (10%, 20 Years)

= $20000 * 8.5136 = $170272

Interest Expense for year 1 = 170272 *10% = 17027.2

Current lease liability for year 2014 = $20000

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