Question

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $19 million.
  
This noncancelable lease had the following terms:

• Lease payments: $2,836,767 semiannually; first payment at January 1, 2018; remaining payments at June 30 and December 31 each year through June 30, 2022.
• Lease term: 5 years (10 semi-annual payments).
• No residual value; no purchase option.
• Economic life of equipment: 5 years.
• Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.
• Fair value of the computers at January 1, 2018: $23 million.

  
What is the outstanding balance of the lease liability in Lone Star's June 30, 2018, balance sheet? (Round your answer to the nearest dollar.)

Multiple Choice

• None of these answer choices is correct.

• $23,000,000.

• $18,334,628.

• $18,634,637.

Answer 1

First payment is made on Jan 1
Therefore Oustanding liability for calculation of Interest for 1st period = $23,000,000 - $2,836,767 = $20,163,233
Interest for 6 months = $20,163,233 x 5% = $1,008,162

Payment towards lease liability = Lease payment - Interest for the period
= $2,836,767 - $1,008,162 = $1,828,605

Therefore outstanding balance of the lease liability in Lone Star's June 30, 2018, balance sheet = $20,163,233 - $1,828,605

= $18,334,628

Answer is b. $18,334,628