PROBLEM 11-4 Operating and Capital Leases LO 4

The following footnote was disclosed at the beginning of 2016 (January 1, 2016).

At January 1, 2016

	Capital Lease	Operating Lease
Year	Payment	Payment
2016	$ 5,000	$ 6,000
2017	5,000	6,000
2018	5,000	6,000
2019	5,000
2020	5,000
Total payments	$25,000	$18,000
Interest (10%)	6,046
Present value	$18,954

The capital lease began on January 1, 2015 when the fair value of the capital lease was $21,776 (with a six-year life). The operating lease began on January 1, 2016when the fair value of the operating lease at the inception of the lease was $14,921 (with a three-year lease term). Straight-line depreciation is used for all assets. Each lease requires equal annual payments to be made at year-end.

Required:

Under existing U.S. GAAP, what is the amount of lease liability recorded on the balance sheet at January 1, 2016?

If the proposed changes in accounting for leases become authoritative, what would be the amount of lease liability recorded on the balance sheet at January 1, 2016?

Which approach (part 1 or part 2) do you think provides more relevant information to the users of the financial statements? Why?