On January 1, 2016, Mary Company leased equipment, signing a five-year lease tha
ID: 2496738 • Letter: O
Question
On January 1, 2016, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first payment will be made at December 31, 2016. In addition, Mary guarantees the residual value to be $8,000 at the end of the lease term. Mary correctly uses the lessor's implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows:
Present value of $1 0.567427
Present value of ordinary annuity of $1 3.604776
a. Refer to Exhibit 20-2. What is the interest expense associated with the lease obligation for the year ending December 31, 2017? (Round answers to the nearest dollar.)
b. Refer to Exhibit 20-2. If the Mary Company uses the straight-line method of depreciation for its assets, what is the amount of depreciation expense for the leased equipment for the year ending December 31, 2016?
c. Refer to Exhibit 20-2. What would be the debit to Leased Equipment under Capital Leases on January 1, 2016? (Round amounts to the nearest dollar.)
d. Refer to Exhibit 20-2. What is the amount of interest expense associated with the leased equipment for the year ending December 31, 2016?
I know the answers, i just need step by step guide on how to get the answer. Thanks!
Explanation / Answer
Answer (a)
Amount Outstanding in year 0 = 20000*3.604776 + 8000*0.567427
Amount Outstanding in year 0 = 76,635
Amount Outstanding in year 1 = 76,635 - (20000 - 76635*12%)
Amount Outstanding in year 1 = 65831
Interest obligation for year ending 31st Dec 2017 = Amount Outstanding in year 1 * Implicit rate of return of lessor
Interest obligation for year ending 31st Dec 2017 = 65831* 12% = 7900
Answer (b)
Captitalized value of asset in the books of Mary = Annual lease rental * Present value of ordinary annuity + residual Value*Present Value
= 20000*3.604776 + 8000*0.567427
= 76,635
Amount of depreciation for Mary company for year ending 31st Dec 2016 =(Capitalized value-Residual value) /year
=(76635- 8000)/5
= 13,727
Answer (c)
Debit to the leased equipemnt under capital lease is Captitalized value of asset in the books of Mary = Annual lease rental * Present value of ordinary annuity+ residual Value*Present Value
= 20000*3.604776 + 8000*0.567427
= $ 76,635
Answer (d)
Amount of interest expense associated with the leased equipment for the year ending December 31, 2016 = Amount Outstanding in year 0 *12%
Amount of interest expense associated with the leased equipment for the year ending December 31, 2016 = 76635*12%
Amount of interest expense associated with the leased equipment for the year ending December 31, 2016 = $ 9196
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