[itooshallpass]

Can someone explain in regular english the concept behind calculating this amount? It’s the one thing that I get hung up on with leases…

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?

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
This amount is a current liability since it is payable within the current period. The remaining lease obligation is noncurrent.

[tygolfer]

Pretty sure the interest payable isn't included at the end of year 1 is because the time period the interest is incurred hasn't occurred yet. Also, looking at what the entry would be at year 2 can help, and you have to know the calculation for interest and principal to do so which is in the calculation above.

YR2
DR Interest Expense – 11,500
DR Lease Liability – 8,500
CR Cash – 20,000

The amount due in the next year related to the lease liability is 8,500, pretty sure that is why it is included in current liability and the interest is not.

[Yahmon]

The best way is to use JE. I also think about this the same way I look at bonds current liability which is the difference between the actual cash paid and interest expense or income in the case of bonds. Hope this helps.

FAR 8/20/15 - Passed 77
AUD 10/10/15 -
BEC TBD
REG TBD

[Author]

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