Question

On January 1, Year 6, Magnus Co. leased a machine to Fisher Co. The machine was acquired by Magnus on January 1, Year 1, for $200,000. The useful life of the machine was 20 years with no salvage value, and it was depreciated by Magnus using the straight-line method. The lease term is 10 years, and the present value of the lease payments to be made over the lease term was $90,000. Annual equal lease payments of $14,647 are payable at the end of each year starting December 31, Year 6. The discount rate for the lease is 10%. Fisher depreciates all of its assets using the straight-line method. Assume that both the remaining economic life of the machine and the salvage value did not change as a result of the lease.

For each of the following independent situations, enter in the designated cells below the appropriate amounts for the carrying amount of the right-of-use asset that should be reported in Fisher’s December 31, Year 6, balance sheet. Enter all amounts as positive values. Round all amounts to the nearest whole number. If no entry is necessary, enter a zero (0) or leave the cell blank.

Situation	Carrying amount
1. The ownership of the machine will transfer to Fisher at the end of the lease term.
2. The lease was classified as an operating lease.
3. At the inception of the lease, the present value of the minimum lease payments was 95% of the fair value of the machine.
4. The lease contained a purchase option at the end of the lease term that Fisher is reasonably certain to exercise. The present value of the lease payments includes the exercise price of the option, and the discount rate of the lease is 12%.

Answer 1