Answer: $5,222,400
Explanation:
Here is the complete question:
On December 31, 2021, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are $2,100,000 (including $100,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2021, and the second payment was made on December 31, 2022. The five lease payments are discounted at 10% over the lease term. The present value of lease payments at the inception of the lease and before the first annual payment was $8,756,727. The lease is appropriately accounted for as a finance lease by Harris. In its December 31, 2022 balance sheet, Harris should report a lease liability of
a. $6,340,000.
b. $6,240,000.
c. $5,706,000.
d. $5,222,400
In its December 31, 2022 balance sheet, Harris should report a lease liability of:
Present value of annual lease payments = $8,756,727
Less: Annual lease payment on December 31, 2021 = $2,100,000
Less: Annual lease payment on December 31, 2022 = $2,100,000
Add: Interest expense on lease liability = $665,673
Lease liability = $5,222,400
Note that the interest expense on lease liability is calculated as:
= (8756727 - 2100000) × 10%
= $6,656,727 × 0.1
= $665,672.7 = $665,673
