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Question: Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $172,076, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase. Pisa's incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made at the beginning of Year 2?

a. $172,076

b. $122,833

c. $126,480

d. $136,599

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Accounting Basics, Accounting

Category:- Accounting Basics
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