Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) 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 in Year 2?
_______________ PV Annuity Due________ PV Ordinary Annuity
8%, 4 periods ............ 3.57710 ........................ 3.31213
10%, 4 periods .......... 3.48685 ........................3.16986

A. $273,199
B. $344,152
C. $245,666
D. $252,960

Transcribed Image Text:

12/31/11 12/31/10 $204,000 $96,000 Cash Accounts receivable 180,000 108,000 Merchandise inventory 192,000 240,000 480,000 Property, plant, equipment 304,000 Less accumulated depreciation (160,000) 144,000 (152,000) 328,000 $720,000 S772,000 $88,000 $48,000 Accounts payable Income taxes payable 176,000 196,000 300,000 Bonds payable 180,000 Common stock 108,000 108,000 Retained earnings 168,000 120,000 $720,000 $772,000