Question
In: Accounting
On January 1, 2018, Packard Corporation leased equipment to Hewlitt Company. The lease term is eight...
On January 1, 2018, Packard Corporation leased equipment to Hewlitt Company. The lease term is eight years. The first payment of $450,000 was made on January 1, 2018. Remaining payments are made on December 31 each year, beginning with December 31, 2018. The equipment cost Packard Corporation $2,400,000. The present value of the lease payments is $2,640,788. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2019, balance sheet?
a- $1,950,867
b- $1,509,854
c- $1,959,867
d- $1,705,854
Solutions
Expert Solution
| Date | Annual payment | Interest expense 10% | Reduction in lease liability | Lease liability |
| January 1, 2018 | 2640788 | |||
| January 1, 2018 | 450000 | 0 | 450000 | 2190788 |
| December 31, 2018 | 450000 | 219079 | 230921 | 1959867 |
| December 31, 2019 | 450000 | 195987 | 254013 | 1705854 |
| Option D $1,705,854 is correct | ||||
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