[YouCanDoIt]

On December 30, 20X1, Rafferty Corp. leased equipment under a capital 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 lease obligation was recorded on December 30, 20X1, 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, 20X1, balance sheet?

A.$6,500

B.$8,500

C.$11,500

D.$20,000

Initial lease obligation on December 31, 20X1 $135,000
Less payment made on December 31, 20X1 – 20,000
——–
Lease obligation during 20X2 $115,000
========

Portion of December 31, 20X2, payment that is interest =
rate x obligation x time = 10% x $115,000 x 1 = $11,500
Portion of December 31, 20X2, payment that is related
to lease obligation = payment – interest portion =
$20,000 – $11,500 = $8,500

==================================================================
Are these correct
12/30/Y1:
Dr. Lease Asset 135k
Cr. Capital Lease Liability 135k

12/30/y1:
Dr cap. Lease Liability 20k
Cr. Cash 20k

12/31/y1:
Dr Capital Lease Liability 8.5k
Dr Lease Interest Expense 11.5k
Cr. Cash 20k

FAR: 76
REG: Currently studying
AUD:
BEC:

[YouCanDoIt]

I don't know why this site is so slow for me, might be my computer. a LOT OF LAG in between typing.

For above question:
Basically
year 1 –cv: 135-20=115k
y1:– cv used to compute interest above
year2: new CV 115-8.5=106.5K

FAR: 76
REG: Currently studying
AUD:
BEC:

[Globetrotter]

YouCanDoIt (Love the name, BTW)
Here is what I would record.
My first two J/Es would match yours.
For the third one, I do not think that they paid $20K again this year.
Payment due 12/31/x1 was paid on 12/30/x1.
My third entry would be (And I could be wrong):
Dr Lease Payable $8500
Cr. Lease payable – current portion $8500
Effectively, you are moving $8500 from LT liability to ST Liability.
PS. It takes forever to post for me too.

[YouCanDoIt]

Thank you 🙂
Okay, I believe I was reading what the question was asking me wrong and I was confusing myself. The question was asking CURRENT LIABILITIES (what’s due within 12 months), and thus in Year2, which would be: 8,500.

Your entry clicked a light bulb in my head, thanks!!!

I was confusing myself as if there were two payments being made in year1, and that did not make sense to me, so I posted the JE’s.
The logic is that: when 1st payment is made, there hasn’t been any time for interest to accrue, thus for 1st payment of 20k, it’s a simple Dr and Cr without interest included.
The payments from then on, do include interest, and so we adjust the lease liability and interest accordingly. And lease liability adjustment within the 12 months= current!!

FAR: 76
REG: Currently studying
AUD:
BEC:

[Author]

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