Barnum, Inc., leased equipment from Baily Supply on December 31, 2008. The lease

Question

Barnum, Inc., leased equipment from Baily Supply on December 31, 2008. The lease term is for the10-year period expiring December 30, 2018. The useful life of the leased asset is 10 years. Equal annu-al payments under the lease are $100,000 due on December 31 of each year. The first payment wasmade on December 31, 2008. Barnum’s incremental borrowing rate was 12% at December 31, 2008.Baily’s implicit rate for the lease is 10% and is known by Barnum. Barnum appropriately accounts forthe lease as a capital lease What is the balance in Barnum’s “Liability Under Lease Agreements” account at December 31, 2009?a.$533,492b.$545,010c.$643,492d.$800,000

Explanation / Answer

The correct option is option - A

That is $100,000 x 5.33492 = $533,492.

Present value of ordinary annuity for 10% at 8 year from table is 5.33492.

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