On December 31, 2013, Burton, Inc. leased machinery with a fair value of $1,050,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $200,000 beginning December 31, 2013. The lease is appropriately accounted for by Burton as a capital lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2013 balance sheet, Burton should report a lease liability of
a. $758,160.
b. $850,000.
c. $939,180.
d. $958,160.
Answer: A
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