On January 1, 2016, Blaugh Co. signed a long-term lease for an office building.

Question

On January 1, 2016, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, 2016, and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, 2016, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh’s December 31, 2016, balance sheet, the capital lease liability should be which of the following:

$102,500

$111,500

$112,500

$290,000

Explanation / Answer

The Capital lease liability shown on the balance sheet will be the present value of 29 pending instalments of $10,000 at 8%.

So the correct answer is $111,500

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