Question

On January 1, 2020, Digital, Inc. leased heavy machinery from Young Leasing
Company. The terms of the lease require annual payments of $25,000 for 20
years beginning on December 31, 2020. The interest rate on the lease is 10%.
Assume the lease qualifies as a capital lease and Digital, Inc. employs the
double-declining balance method to depreciate its assets. 

Use the time value of money factors posted in carmen to answer this question. No credit will be
awarded for this question using a means other than these table factors to answer this question.

1) Calculate the book value of the leased asset at December 31, 2022.

2) Calculate the balance in the lease liability account on December 31, 2021 after the second lease payment is made.

3) Calculate the amount of the lease liability at December 31, 2021 that would be classified as a current liability.

Answer 1

Solution 1:

Fair value of leased assets = Present value of minimum lease payments = $25,000 * cumulative PV Factor at 10% for 20 periods

= $25,000 * 8.52 = $213,000

Depreciation rate - SLM = 1/20 = 5%

Depreciation rate - DDB = 5%*2 = 10%

Book value of leased asset on 31-dec-2022 = $213,000 (1-0.10)^3 = $155,277

Solution 2:

Digital Inc.
Lease Amortization Schedule
Date	Annual lease payment	Interest on liability	Reduction of lease liability	Lease liability
1-Jan-20				$213,000
31-Dec-20	$25,000	$21,300	$3,700	$209,300
31-Dec-21	$25,000	$20,930	$4,070	$205,230
31-Dec-22	$25,000	$20,523	$4,477	$200,753

Refer Lease amortization schedule, Balance in the lease liability account on December 31, 2021 after the second lease payment is made = $205,230

Solution 3:

Refer Lease amortization schedule, Amount of the lease liability at December 31, 2021 that would be classified as a current liability = $4,477