N Corp. entered into a nine-year capital lease on a warehouse on December 31, 20

Question

N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2013. Lease payments of $34,000, which includes real estate taxes of $1,500, are due annually, beginning on December 31, 2014, and every December 31 thereafter. N Corp. does not know the interest rate implicit in the lease; N's incremental borrowing rate is 11%. The rounded present value of an ordinary annuity for nine years at 11% is 6. What amount should N report as capitalized lease liability at December 31, 2013?

$204,000.

$292,500.

$195,000.

$306,000.

Explanation / Answer

Given that N Corp entered into a 9 year lease of $34000 annuity payments payable annually beginning from Dec 2014.

Also given that the lease payment includes a real estate tax component of $1500 which needs to be reduced from annuity while arriving at the lease liability.

Hence the amount of lease liability is = lease payment* present value of annuity for 9 years at 11%.

= ( 34000-1500)*6= $195000.

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