Question

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. Rabbit Co has 2 options to acquire a new machine with an estimated useful life...

. Rabbit Co has 2 options to acquire a new machine with an estimated useful life of 6 years. It can buy it today, the 1st January 20X3 at a cash price or it can lease the asset under the following agreement:

Fair value of the asset - $100,000

An initial payment of $13,760 will be payable straight away

5 further annual payments of $20,000 will be due, beginning on 1st Jan 20X3

The interest rate implicit in the lease is 8%

If Rabbit decides to lease the asset, what will be recorded in its financial statements at the y/e 31 December 20X4 in respect of the lease liability?

                                    Finance cost                   Non-current liability                      Current liability

A                                       4,123                                  35,662                                             20,000

B                                       5,299                                   51,539                                             20,000

C                                       5,312                                   51,712                                             20,000

D                                      5,851                                    43,709                                            15,281

Solutions

Expert Solution

Lease payable (100000-13760)          86,240
Lessee
Lease Amortization Schedule
Date Annual Lease Payment Interest on Liability Reduction of Lease Liability Lease Liability
Jan 1, 20X3              86,240
Jan 1, 20X3             20,000                   -                 20,000              66,240
Jan 1, 20X4             20,000            5,299               14,701              51,539
Jan 1, 20X5             20,000            4,123               15,877              35,662
Jan 1, 20X6             20,000            2,853               17,147              18,515
Jan 1, 20X7             20,000            1,485               18,515                        -  
Interest on Liability = Beginning Lease Liability * 8%
Reduction of Lease Liability = Annual Lease Payment - Interest on Liability
Lease Liability = Beginning Lease Liability - Reduction of Lease Liability
Option B is a correct. B
Accrued interest expense reported on December 31, 20X4               5,299
Non-current liability (66240+5299-20000)             51,539
Current liability             20,000

ekkarill92 answered 2 years ago
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