On December 31, 2015, JKL Leased a New Machine from MNO.The

On December 31, 2015, JKL leased a new machine from MNO.The following information relates to the lease transaction: * Market value of the machine at inception of lease: $500,000
* the machine has an estimated useful life of seven years, which coincides with the lease term.
* lease rentals consist of seven equal annual payments of $100,000, the first of which was paid on December 31, 2015.
* MNO's implicit interest rate is 12 percent, which is known by JKL.
* JKL's incremental borrowing rate is 14 percent at December 31, 2015.
* present value of an annuity of $1 in advance for seven periods at 12 percent is 5.11.
* present value of an annuity of $1 in advance for seven periods at 14 percent is 4.89.
At the inception of the lease, JKL should record a capitalized lease liability of:

A) $489,000
B) $500,000
C) $411,000
D) $511,000

Correct Answer:

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