Compensate the lessor for inflation

Reference no: EM131765055

Question: ABC company leased a food cooler under a 4 year lease agreement. The lease begins on January 1, YR 01, with rental payments due at the start of each rental period. The lease is properly classified as an operating lease and includes annual increases in the rental payment to compensate the Lessor for inflation. The cooler's service potential is expected to remain constant over the lease period.

Required rental payments specified in the lease contract are as follows: Year Date Payment is Due Amount of rental Payment YR01 Jan 1, YR01 $10 YR02 Jan 1, YR02 $20 YR03 Jan 1, YR03 $30 YR04 Jan 1, YR04 $40 Total rental payment $100 ABC company correctly computed the Lease Liability as $83 using a discount rate of 10%. ABC company's yearend is December 31st. Assuming that all payments are made when due, ABC company's December 31, YR01 financial statements will include the following balances (rounded to the nearest dollar).

A. Lease expense is $10 and Lease Liability is $73

B. Lease expense is $10 and Lease Liability is $80

C. Lease expense is $25 and Lease Liability is $73

D. Lease expense is $25 and Lease Liability is $80

E. None of the above

Reference no: EM131765055

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