This problem is designed to allow you to see how different lease durations and interest rates affect the relationship between the capitalized lease asset and lease liability. Of course, these same asset–liability relationships apply if you wish to constructively capitalize a lease that the lessee has treated as an operating lease.
Assume that Cambria Corporation signs a noncancelable lease that obliges it to make annual payments of $10,000. This amount excludes all executory costs, and the lease term includes no residual value guarantee. The lease will be treated as a capital lease. Cambria uses straight-line depreciation for the leased asset.

Required:
1. Assume that the lease payments are made at the beginning of each period.
a. If the discount rate is 8% and the lease runs for 20 years, approximately when—if at all—does the capitalized lease liability first exceed the depreciated net carrying value of the leased asset?
b. Repeat this calculation using a 12% discount rate for 20 years.
c. Repeat this calculation using a 12% discount rate for 12 years.
2. Assume that the lease payments are made at the end of each period.
a. If the discount rate is 8% and the lease runs for 20 years, does the depreciated carrying value of the leased asset ever exceed the capitalized lease liability?
b. Will this result change if you raise the interest rate and/or shorten the duration of the lease?