Rogers Company signs a five-year capital lease with Packer Company for office equipment. The annual year-end lease payment is $10,000 (due at the end of each year), and the interest rate is 8%.
Required
1. Compute the present value of Rogers' five-year lease payments.
2. Prepare the journal entry to record Rogers' capital lease at its inception.
3. Complete a lease payment schedule for the five years of the lease with the following headings. Assume that the beginning balance of the lease liability (present value of lease payments) is $39,927. To find the amount allocated to interest in year 1, multiply the interest rate by the beginning-of-year lease liability. The amount of the annual lease payment not allocated to interest is allocated to principal. Reduce the lease liability by the amount allocated to principal to update the lease liability at each year-end.

4. Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a five-year life for the office equipment.

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Beginning Balance of Lease Liability Ending Balance of Lease Liability Interest on Lease Reduction of Lease Period Cash Lease Payment Ending Date Liability Liability