Question

On January 1, 2018, Betty DeRose, Inc. leased office furniture and equipment
from Young Leasing Company. The terms of the lease require annual payments
of $50,000 for 10 years with the first payment being due on December 31, 2018.
Assume the interest rate on the lease is 10% and the lease qualifies as a
capital lease. Betty DeRose depreciates all assets using the double-declining
balance method.

Calculate the total amount of expense related to this lease reported on Betty's
2019 income statement. Enter your answer with two places after the decimal point
(i.e., 10,123.40). 

Answer 1

Solution:

Present value of lease payments = Annual lease payment * cumulative PV Factor at 10% for 10 periods

= $50,000 * 6.144567 = $307,228

Betty De Rose Inc, will recognize office furniture and equipment at cost of $307,228 in books

Annual depreciation SLM = $307,228 / 10 = $30,723

Depreciation Rate SLM = $30,720 / $307,228 = 10%

Depreciation rate double declining = 10%*2 = 20%

Depreciation expense for 2018 = $307,228*20% = $61,446

Carrying value for 2018 = $307,228 - $61,446 = $245,782

Depreciation expense for 2019 = $245,782 * 20% = $49,156.40

Interest expense for 2018 = $307,228 * 10% = $30,723

Lease liability at the end of 2018 = $307,228 + $30,723 - $50,000 = $287,951

Interest expense for 2019 = $287,951 * 10% = $28,795.10

Total amount of expense related to this lease reported on Betty's 2019 income statement = Depreciation expense + Interest expense

= $49,156.40 + $28,795.10 = $77,951.50