Problem - The following footnote was disclosed at the beginning of 2016 (January 1, 2016). At January 1, 2016 Capital Lease Operating Lease Year Payment Payment 2016 $ 5,000 $ 6,000 2017 5,000 6,000 2018 5,000 6,000 2019 5,000 2020 5,000 Total payments $25,000 $18,000 Interest (10%) 6,046 Present value $18,954 The capital lease began on January 1, 2015 when the fair value of the capital lease was $21,776 (with a six-year life). The operating lease began on January 1, 2016 when the fair value of the operating lease at the inception of the lease was $14,921 (with a three-year lease term). Straight-line depreciation is used for all assets. Each lease requires equal annual payments to be made at year-end.
Required:
1. Under existing U.S. GAAP, what is the amount of lease liability recorded on the balance sheet at January 1, 2016?
2. If the proposed changes in accounting for leases become authoritative, what would be the amount of lease liability recorded on the balance sheet at January 1, 2016?
3. Which approach (part 1 or part 2) do you think provides more relevant information to the users of the financial statements? Why?