Answer:
The amount that Allen should report as capital lease liability in its December 31, Year 2, balance sheet is $266,746.
Explanation:
From the question, it can be seen that 10% is used by the lessee. The reason is that the 10% is what is known by the lessee and it is also lower than 12%. Therefore, we have:
Balance of the lease liability after the first payment = Present value on December 31 of Year 1 - Amount of the first payment = $337,951 - $50,000 = $287,951
It should noted that there is no interest in the amount of the first payment as it was an immediate payment.
Interest expense in Year 2 = 10% * Balance of the lease liability after the first payment = 10% * 287,951 = $28,795
Lease liability paid in Year 2 = Cash paid - Interest expense in Year 2 = $50,000 - $28,795 = $21,205
The journal entries at December 31, Year 2 will then be as follows:
<u>Accounts Title Debit ($) Credit ($) </u>
Lease liability 21,205
Interest expense 28,795
Cash 50,000
<em><u>(To record lease payment.) </u></em>
Therefore, we have:
Capital lease liability on December 31 of Year 2 = Balance of the lease liability after the first payment - Lease liability paid in Year 2 = $287,951 - $21,205 = $266,746
Therefore, the amount that Allen should report as capital lease liability in its December 31, Year 2, balance sheet is $266,746.
