With a lease commencement date of January 1, 2019, Mafaldine Company leases equi

Question

With a lease commencement date of January 1, 2019, Mafaldine Company leases equipment with a fair value of $625,000 to Sagnette Company under the following terms Lease term Annual rental payable at inception and at December 31, 2019 and 2020 $200,000 Useful life of equipment Sagnette's incremental borrowing rate Implicit interest rate in lease (known by Sagnette) Present value of annuity of $1 in advance for 3 periods at years 5 years 6% 8% 6% 2.8334 8% 2.7833 Mafaldine routinely leases equipment of this nature. Sagnette has no other leased equipment. Sagnette amortizes the liability using the effective interest method. Neither entity considers the 3- year lease term to be a major portion of the asset's life. Nor do they consider the present value of the lease payments to be substantially all of the asset's value. Considering only the above information, what amount of non-debt liability should Sagnette report in its December 31, 2019 balance sheet? Multiple Choice $225,000 $0 $188,680 $185,193

Explanation / Answer

Answer : $185193

$200000 * 2.7833

= $556660

First payment $200000

Remaining amount = $556660 - $200000

= $356660

Interest = $356660 * 8%

= $28533

first payment principal amount = $200000 - $28533

= $171467

Remaining balance amount = $356660 - $171467

= $185193.

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