Question of the Week

At the beginning of the year, HIJ Corp. began to lease new equipment. This lease is being capitalized and its term has been set for 8 years. The rate implicit in the lease is 8.5% and thus, the original value of the capitalized lease is determined to be $712,000. If at the end of the year, the company is reporting a lease obligation of $652,000, what must be the annual total lease payments?


A) $60,520
B) $120,520
C) $149,000
D) $60,000


Answer:

The correct answer is: b)

Total Lease Payment = Interest expense + Principal repayment

Step 1: Interest expense = 8.5% of 712,000 = 60,520
Step 2: Principal repayment = 712,000 - 652,000 = 60,000
Step 3: Total Lease Payment = 60,520 + 60,000 = $120,520