On December 31, 2014, Harris Co. leased a machine from Catt, Inc. for a five-yea

Question

On December 31, 2014, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are $1,050,000 (including $50,000 annual executory costs) and are due on December 31 of each year. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $4,170,000. The lease is appropriately accounted for as a capital lease by Harris. In its December 31, 2015 balance sheet, Harris should report a lease liability of?

*answer is $2,487,000 I just dont know how to get it :)*

Explanation / Answer

Therefore, the net outstanding balance is $2,487,000.

Note: There are two payments are made on Dec. 31, 2014 and Dec. 31, 2015.

Particulars Amount ($) Value of lease before first annual payment (Dec. 31, 2014 4,170,000 Less: First payment made (Payment each year = $1,050,000 - $50,000) 1,000,000 Balance as on Jan. 01, 2015 3,170,000 Add: Interest for the year ($3,170,000*10/100) 317,000 Total outstanding balance 3,487,000 Less: Second payment made ($1,050,000 - $50,000) 1,000,000 Net outstanding as on Dec. 31, 2015 2,487,000

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