[Anonymous]

Becker Question –

On December 30, Year 1, Rafferty Corp. leased equipment under a capital (finance) lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital (finance) lease obligation was recorded on December 30 Year 1, at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this capital lease in its December 31, Year 1 balance sheet?

a. $6,500
b. $8,500
c. $11,500
d. $20,000

Solution:

$135,000- $20,000 = $115,000
$115,000 x 10%= $11,500
Current liability for this capital lease: $20,000 – $11,500 = $8,500

Ok, so my question is that why isn’t the interest payment of $11,500 included in the current liabilities for this capital lease in its December 31, Year 1 balance sheet? The interest payable of $1,150 should be considered as a current liability here because the annual payment of $20,000 will be paid on December 31st year 2….As a result, I think the correct answer should be “d.” Or, $20,000.

Thank you everyone!

 

 

[tphil]

I believe the reason the interest payable isn't included in the current liability at the end of year 1 is because the time period over which interest accrues hasn't occurred yet. Yes, they'll have to pay the interest at the end of year 2, but that interest has nothing to do with year 1, so it should be accrued over time during year 2 instead.

[NYCaccountant]

You actually don't owe the interest yet. The first payment of $20,000 reduced the principle to 115k. When you make the next payment at the end of the second year, for 20,000, 11,500 of that will be interest and the rest (8,500) will be used to pay down the principle. Similar to a loan when the entire principle is a liability except for the portion you have to pay back within 12 months. Because you would technically be paying back some of the “loan principle”, the 8,500 is a current liability.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Anonymous]

Ah I see. Thank you so much tphil and NYCaccountant!

[carpeCPA]

@NYCaccountant – Seems like you've got FAR perfected with how much clarification you've been providing (it's been very helpful to me as I study FAR btw so thank you!) Would you mind sharing how you have been studying and what materials you are using?

REG - 93 (Jul'13)
FAR - 97 (Dec '13)
AUD - 99 (May '14)
BEC - Jul '14

Becker Self Study/Ninja Notes/Ninja Audio/Ninja MCQ/Wiley Test Bank/Wiley Book

[NYCaccountant]

@ Rache1 I am using Wiley and I just read the book for two hours everynight, then do all of the questions. I generally spend 1 hour every morning reviewing old material, 2 hours a night learning new material. I'm actually almost done with Wiley learning new material and will begin full review early September. At that point, I'm hoping to only get better at this stuff. I just got done with derivatives and hedging and honestly don't remember all of the disclosures and what not. I took a practice test on Wiley for the entire section and got an 86 (43 out of 50 correct). I'm thinking maybe this has a lot to do with guessing correctly, because I sure as hell don't feel comfortable with derivatives and hedging.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Anonymous]

Is it because the interest of 11,500 has to be paid on Dec 31 year2 and it hasn't accrued yet?
If I am wrong,could you please explain in detail.
Thank you 🙂

[Author]

Replies