Question

On December 31, 2017, Ball Company leased a machine from Cook for a 10-year period, expiring December 30, 2027. Annual payments of $100,000 are due on December 31. The first payment was made on December 31, 2017, and the second payment was made on December 31, 2018. The present value at the inception of the lease for the 10 lease payments discounted at 10% was $676,000. The lease is appropriately accounted for as a capital lease by Ball.

Required:

1. Compute the December 31, 2018, amount that Ball should report as a lease liability after the first payment has been made.
2. What portion of this total liability should be classified as a current liability?

Answer 1

Solution :

Present value of lease payment = $676,000

Lease payment on 31.12.2017 = $100,000

Interest expense for 2018 = ($676,000 - $100,000) * 10% = $57,600

Lease payment on 31.12.2018 = $100,000

Lease liability to be reported by Ball on 31.12.2018 = $576,000 + $57,600 - $100,000 = $533,600

Interest expense for 2019 = $533,600 * 10% = $53,360

Reduction in lease liability for 2019 = $100,000 - $53,360 = $46,640

Therefore $46,640 of  total liability should be classified as a current liability