Question

On October 1, 2017, Vaughn, Inc., leased a machine from Fell Leasing Company for five years. The lease requires five annual payments of $10,000 beginning September 30, 2018. Vaughn’s incremental borrowing rate is 11%, and it uses a calendar year for reporting purposes. The machine has a 12-year economic life with zero salvage value. Vaughn correctly classifies the lease as an operating lease under ASU 2016-02. Using (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

At what amount should Vaughn record the leased equipment on October 1, 2017? (Round your answer to the nearest whole dollar.)

What is the amount of rent expense that Vaughn should record for the year ended December 31, 2017, and for the year ended December 31, 2018?

How much of the lease liability should be classified as current on December 31, 2017, and December 31, 2018? (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Part 1)

The amount Vaughn should record the leased equipment on October 1, 2017 is determined as below:

Value of Leased Equipment = Annual Lease Payment*PVOA(Rate, Years)

Here, Annual Lease Payment = 10,000, Rate = 11% and Years = 5

Using PVOA tables, we get,

Value of Leased Equipment = 10,000*PVOA(11%,5) = 10,000*3.6959 = $36,959 (answer for Part 1)

______

Part 2)

The amount of rent expense to be recorded at December 31, 2017 and December 31, 2018 is calculated as follows:

Rent Expense (December 31, 2017) = Annual Lease Payment*3/12 (from October 1, 2017 to December 31, 2017) = 10,000*3/12 = $2,500

Rent Expense (December 31, 2018) = Annual Lease Payment*9/12 (from January 1, 2018 to 30 September 2018) + Annual Lease Payment*3/12 (from October 1, 2018 to December 31, 2018) = 10,000*9/12 + 10,000*3/12 = $10,000

______

Part 3)

The value of lease liability that should be classified as current on December 31, 2017, and December 31, 2018 is arrived with the use of table given below:

Date	Lease Payment	Interest Expense	Current Lease Liability	Balance
01-10-2017				36,959.00
31-12-2017	2,500.00	1,016.37 (36,959*3/12*11%)	1,483.63	35,475.37
30-09-2018	7,500.00	2,926.72 (35,475.37*9/12*11%)	4,573.28	30,902.09
31-12-2018	2,500.00	849.81 (30,902.09*3/12*11%)	1,650.19	29,251.90

Based on the calculations in the above table, we can derive the following information:

Current Portion of Lease Liability (31 December, 2017) = $1,483.63

Current Portion of Lease Liability (31 December, 2018) = $1,650.19