A lessee had a 15 year capital lease requiring equal annual payments.The reduction of lease liability in year three should equal to
A. The current liability shown for the lease at the end of year 2.
B. The current liability shown for the lease at the end of year 3.
am not sure i get the question
I think it should be equal if lessee wants the equal payment.
A current liability is one that you expect to pay within one year (or one operating cycle). At the end of year 2, you expect to reduce the lease liability within one year by the year 3 principle payment; thus, the year 3 principle payment is shown as a current liability at the end of year 2.
At the end of year 3 you’ve already made the year 3 lease payments, so the year 3 principle reduction isn’t a liability (current or otherwise) any longer: you’ve paid it.
Thanks the magician always works the magic