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 $16,000 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $20,000 when its fair value is expected to be $40,000. The machine's estimated useful life is expected to be five years with no residual value. The appropriate interest rate for this lease is 12%. Round your answers to the nearest whole dollar amounts. 1. Calculate the amount to be recorded as a right-of-use asset and the associated lease payable. 2. Prepare an amortization schedule for this lease. 3. Prepare Rumsfeld's journal entries for this lease for 2018 and 2019.

Answer 1

Amount to be recorded right of use asset =[PVA 12%,3*Amount ]+[PVF 12%,3*Fair value at end of useful life]

      = [2.69005*16000]+[.71178*20000]

      = 43040.8+ 14235.6

= $ 57276.4   [rounded to 57276]

find present value annuity factor from annuity table (annuity due)at 12%

find present value factor from table

2)

year	payment	interest	decrease in balance	Value at end
31 dec 2018			16000	57276-16000=41276
2019	16000	41276*.12= 4953.12	16000-4953.12= 11046.88	41276-11046.88= 30229.12
2020	16000	30229.12*.12= 3627.49	16000-3627.49=12372.51	30229.12-12372.51= 17856.61
2021	20000	17856.61*.12= 2143.39	20000-2142.79= 17856.61	0

3)

Date	Account	debit	credit
31 dec 2018	Leased machinery	57276
	Lease payable		57276
31 dec 2018	lease payable	16000
	cash		16000
31 dec 2019	Lease payable	11046.88
	Interest expense	4953.12
	cash		16000

31 dec 2019	Depreciation expense	12425.33
	Accumulated depreciation -leased machinery		12425.33

depreciation = [cost -salvage ]/useful life

                     = [57276-20000]/3

                   = 12425.33