Question

On October 1, 2017, Vaughn, Inc., leased a machine from Fell Leasing Company for five years. The lease requires five annual payments of $10,000 beginning September 30, 2018. Vaughn’s incremental borrowing rate is 11%, and it uses a calendar year for reporting purposes. The machine has a 12-year economic life with zero salvage value. Vaughn correctly classifies the lease as an operating lease under ASU 2016-02. Using (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.) Required: At what amount should Vaughn record the leased equipment on October 1, 2017? (Round your answer to the nearest whole dollar.) What is the amount of rent expense that Vaughn should record for the year ended December 31, 2017, and for the year ended December 31, 2018? How much of the lease liability should be classified as current on December 31, 2017, and December 31, 2018? (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Year	Annual lease rent ($)	PV factors @11%	Present value of lease rent ($)
0	100,000.00	1.00	100,000.00
1.00	100,000.00	0.90	90,090.09
2.00	100,000.00	0.81	81,162.24
3.00	100,000.00	0.73	73,119.14
4.00	100,000.00	0.66	65,873.10
			410,244.57
Less: Payment at the beginning of lease			100,000.00
Leased asset should be recorded at this value by Vaughn			310,244.57

Particulars	Amount ($)
Rent expense for the period December 31, 2017 (100000 x 3/12)	25,000.00
For the year end December 31, 2018	100,000.00

Particulars	Amount ($)
Current liability as on:
31/12/2017	310,244.57
31/12/2018	310,244.57
Less: Lease payment for 2018 (100000 x .9009009)	90,090.09
	220,154.48