Lease Liability
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On December 31, 2007, Patten Co. leased a machine from Bass, Inc. for a five-year period. Equal annual payments under the lease are $630,000 (including $30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2007, and the second payment was made on December 31, 2008. 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 $2,502,000. The lease is appropriately accounted for as a capital lease by Patten. In its December 31, 2008 balance sheet, Patten should report a lease liability of
A) $1,902,000.
B) $1,872,000.
C) $1,711,800.
D) $1,492,200.
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Solution Summary
The solution explains how to calculate the lease liability under capital lease using simple formula.
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On Dec 31 2007, before the payment, the lease liability would be 2,502,000 which is the PV of the minimum lease payments excluding executory costs. The ...
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