Question

In: Accounting

Rumsfeld Corporation leased a machine on December 31, 2018, for a three-year period. The lease agreement...

Rumsfeld Corporation leased a machine on December 31, 2018, for a three-year period. The lease agreement calls for annual payments in the amount of $15,000 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $19,000 when its fair value is expected to be $29,000. The machine's estimated useful life is expected to be five years with no residual value. The appropriate interest rate for this lease is 8%.
  

n/i PV of $1 PV, ordinary annuity PV, annuity due
1 period, 8% 0.92593 0.92593 1.00000
2 periods, 8% 0.85734 1.78326 1.92593
3 periods, 8% 0.79383 2.57710 2.78326


Required:
1. Calculate the amount to be recorded as a right-of-use asset and the associated lease liability.
2. Prepare an amortization schedule for this lease.

Solutions

Expert Solution

ANSWER

1)amount to be recorded as a right-of-use asset and the associated lease liability =[PVAD8%,3*Annual payment ]+[PVF8%,3*purchase price]

     =[2.78326*15,000 ]+[.79383*19,000 ]

    = 41,748.9 + 15,082.77

    =$ 56,831.67[Rounded to 56,831]

2)

Amortisaion schedule
Year ended Payment Interest Reduction in principal Lease carrying value
31 dec 2018 15,000   0 15,000 56,831-15,000 = 41,831
31 dec 2019 15,000   3346.48[41,831*.08] 15,000  -3346.48= 11,653.52 41,831-11,653.52= 30,177.48
31 dec 2020 15,000   2414.20 15,000  -2414.20= 12,585.80 30,177.48-12,585.80=17,591.68

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