Question

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.

Answer 1

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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