Question

On January 1, 2018, Kay Company leased office furniture and equipment
from Young Leasing Company. The terms of the lease require annual
payments of $25,000 for 20 years with the first payment being due on
December 31, 2018. Assume the interest rate on the lease is 10% and
the lease qualifies as a capital lease.

A)Calculate the lease liability account balance at December 31, 2019
after the second lease payment is made.

B) Calculate the amount of the lease liability at December 31, 2019 that would be classified as a long-term liability.

Use the time value of money factors posted in carmen to answer this
Future Value of a Lump-Sum 15% 1.5209 1.7490 2.0114 20% 1.7280 2.0736 2.4883 Cauw Periods 2% 3 1.0151 | 1.0202 1.0253 1.0304 1.0355 1.0407 1.0459 1.0511 1.0617 1.0777 16 1.0831 17 1.0885 1.0939 1.0994 1.1049 1.1104 1.1160 1.1216 1.1272 25 1.1328 60 1.3489 3% 1.0927 1.1255 1.1593 1.1941 1.2299 1.2668 1.3048 1.3439 1.4257 1.5580 1.6047 1.6529 1.7024 1.7535 1.8061 1.8603 1.9161 1.9736 2.0325 2.0938 5.8916 Rate of interest per period in percent 5% 6% 8% 9% 10% 12% 1.1576 1.1910 1.2597 1.2950 1.3310 1.4049 1.21551.2625 1.3605 1.4116 1.4641 1.5735 1.2783 1.3382 1.4693 1.5386 1.6105 1.7623 1.3401 1.4185 1.5869 1.6771 1.7716 1.9738 1.4071 1.5036 1.7138 1.8280 1.9487 2.2107 1.4775 1.5940 1.8510 1.9926 2.1436 2.4760 1.5513 1.6895 1.9990 2.1719 2.3579 2.7731 1.6289 1.7909 2.1589 2.3674 2.5938 3.1059 1.7959 2.0122 2.5182 2.8127 3.1384 3.8960 2.0789 2.3966 3.1722 3.6425 4.1773 5.4736 2.1829 2.5404 3.4259 3.9703 4.5950 6.1304 2.2920 2.6928 3.7000 4.3276 5.0545 6.8660 2.4066 2.8543 3.9960 4.7171 5.5599 7.6900 7 6900 2.5270 3.0256 4.3157 5.1417 6.11598.6128 2.6533 3.2071 4.6610 5.6044 6.7275 9.6463 2.7860 3.3996 5.0338 6.1088 7.4002 10.8038 2.9253 3.6035 5.4365 6.6586 8.1403 12.1003 3.0715 3.8197 5.8715 7.25798.9543 13.5523 3.2251 4.04896.3412 7.9111 9.8497 15.1786 3.3864 4.29196.8485 8.6231 10.8347 17.0001 18.6792 32.9877 101.257 176.031 304.482 897.597 2.6600 3.5832 3.0590 4.2998 3.51795.1598 4.0456 6.1917 5.3503 8.9161 8.1371 15.4070 9.3576 18.4884 10.7613 22.1861 123755 12.3755 26.6233 14.2318 31.9480 16.3665 38.3376 18.8215 46.0051 21.6447 55.2061 24.8915 66.2474 28.6252 79.4969 32.9190 95.3962 4383.99 56347.5 สสส Present Value of a Lump-Sum Periods 72% | 0.9852 0.9803 0.9754 0.9657 0.9609 0.9561 10 | 0.9514 0.9419 0.9279 0.9233 Rate of interest per period in percent 3% 5% 6% 8% 9% 10% 0.9151 0.8638 0.8396 0.7938 0.7722 0.7513 0.8885 0.8227 0.7920 0.7350 0.7084 0.6830 0.8626 0.7835 0.7473 0.6806 0.6499 0.6209 .6311 0.5963 0.5645 0.8131 0.7107 0.6651 0.5835 0.5470 0.5132 0.7894 0.6768 0.6274 0.5403 0.5019 0.4665 0.7664 0.6446 0.5919 0.5003 0.4604 0.4241 0.7441 0.6139 0.5584 0.4632 0.4224 0.3855 0.7014 0.5568 0.4970 0.3971 0.3555 0.3186 0.64190.4810 0.4173 0.3152 0.2745 0.2394 0.6232 0.4581 0.3937 0.2919 0.2519 0.2176 0.6050 0.4363 0.3714 0.2703 0.2311 0.1978 0.5874 0.4155 0.3503 0.2503 0.2120 0.1799 0.5703 0.3957 0.3305 0.2317 0.1945 0.1635 0.5537 0.3769 0.3118 0.2146 0.1784 0.1486 0.5375 0.35890.2942 0.1987 0.1637 0.1351 0.5219 0.3418 0.2775 0.18390.1502 0.1228 0.5067 0.3256 0.2618 0.1703 0.1378 0.1117 0.4920 0.3101 0.2470 0.1577 0.1264 0.1015 0.4776 0.2953 0.2330 0.1460 0.1160 0.0923 0.1697 0.0535 0.0303 0.0099 0.0057 0.0033 12% 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220 0.2567 0.1827 0.1631 0.1456 0.1300 0.1161 0.1037 0.0926 0.0826 0.0738 0.0659 0.0588 0.0011 16 15% 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 0.1869 0.1229 0.1069 0.0929 0.0808 0.0703 0.0611 0.0531 0.0462 0.0402 0.0349 0.0304 0.0002 200 0.5787 0.4823 0.4019 0.3349 0.2791 0.2326 0.1938 0.1615 0.1122 0.0649 0.0541 0.0451 0.0376 0.0313 0.0261 0.0217 0.0181 0.0151 0.0126 0.0105 0.0001 18 0.9141 19 0.9096 0.9051 0.9006 0.8961 0.8917 0.8872 0.8828 | 0.7414

Answer 1

a) First lets calculate the present value of the lease :

present value of lease nothing but present value of annuity

with the help of PVIFA Table

PVIFA( n = 20 ; r = 10) = 8.5200

so value of lease = 25,000 x 8.52

= 213,000

at the starting of lease the amount of $213,000 would be recognize as lease liability

so in the first year(December 31st ,2018):

outstanding balance = $213,000

interest rate = 10%

interest = 213,000 x 10% = 21300

annual lease payment = 25,000

so principal amount paid = annual lease payment - interest

= 25,000 - 21,300

= $3700

so balance principal at the end of first year = 213,000 - 3700 = $209,300

second year:

outstanding balance = 209,300

interest = 209,300 x 10% = $20,930

annual lease payments = 25,000

principal amount paid = 25,000 - 20,900

= $4100

so balance amount after second lease payment made = 209300 - 4100

= $205,200

and also long term liability = $205,200