On January 1, 2018, Packard Corporation leased equipment to Hewlitt Company. The lease term is eight years. The first payment of $450,000 was made on January 1, 2018. Remaining payments are made on December 31 each year, beginning with December 31, 2018. The present value of the lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2019, balance sheet

The balance reported as a liability by Dec 31, 2019 = $1,704,900

Explanation:

First, a portion of  the question is missing, the full question is as follows

On January 1, 2018, Packard Corporation leased equipment to Hewlitt Company. The lease term is eight years. The first payment of $450,000 was made on January 1, 2013. Remaining payments are made on December 31 each year, beginning with December 31, 2018. The equipment cost Packard Corporation $2,400,000. The present value of the minimum lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2019, balance sheet?

Solution

First, we know that the Present value of the minimum lease payment is $2,640,00. Hence, we calculate the balance reported as follows

January 1, 2018

Begining Balance = $2,640,000

Total Lease Payment = $450,000

Interest at 10% = (interest of this date is 0)

Hence, the principla to be repaid = $450,000

Finally, the Ending Balance = Begining Balance - Principal Repayment

= $2640,000 - $450,000 = $2,190,000

December 31, 2018

Begining Balance = $2,190,000

Total Lease Payment = $450,000

Interest at 10% = 0.10 x 2,190,000 = $219,000

Hence, the principla to be repaid = $450,000- $219,000 = $231,000

Finally, the Ending Balance = Begining Balance - Principal Repayment

= $2,190,000- $231,000= $1,959,000

December 31, 2019

Begining Balance =$1,959,000

Total Lease Payment = $450,000

Interest at 10% = 0.10 x $1,959,000= $195,900

Hence, the principla to be repaid = $450,000- $195,900= $254,100

Finally, the Ending Balance = Begining Balance - Principal Repayment

= $1,959,000- $254,100= $1,704,900

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