Question

Q1: Rumsfeld Corporation leased a machine on December 31, 2020, for a three-year period. The lease agreement calls for annual payments in the amount of $18,000 on December 31 of each year beginning on December 31, 2020. Rumsfeld has the option to purchase the machine on December 31, 2023, 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%.

n, i                               PV of $1              PV, ordinary annuity               PV, annuity due

1 period, 12%                0.89286                                      0.89286                             1.00000

2 periods, 12%              0.79719                                      1.69005                             1.89286

3 periods, 12%              0.71178                                      2.40183                             2.69005

Required:

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 Rumsfeld.
3. Prepare Rumsfeld's journal entries for this lease for 2020, 2021, 2022, and 202

Answer 1

1		Computations of right-of-use asset:
		PV of Payments (18,000 x 2.69005)	$48,421
		PV of BPO (20,000 x 0.71178)	$14,236
			$62,657
2
	Date	Annual Lease Payment	Interest Exp.	Amortization of Lease Payable	Lease Payable
	Dec 31, 2020				$62,657
	Dec 31, 2020	$18,000		$18,000	$44,657
	Dec 31, 2021	$18,000	$5,359	$12,641	$32,016
	Dec 31, 2022	$18,000	$3,842	$14,158	$17,858
3	Date	Accounts Titles & Explanation	Debit	Credit
	Dec 31, 2020	Right-of-use asset	$62,657
		Lease Payable		$62,657
	Dec 31, 2020	Lease Payable	$18,000
		Cash		$18,000
	Dec 31, 2021	Lease Payable	$12,641
		Interest Expense	$5,359
		Cash		$18,000
	Dec 31, 2021	Amortization Expense	$12,531
		Right-of-use asset		$12,531
		(62,657/5)
	Dec 31, 2022	Lease Payable	$14,158
		Interest Expense	$3,842
		Cash		$18,000
	Dec 31, 2022	Amortization Expense	$12,531
		Right-of-use asset		$12,531
		(62,657/5)