oblem 15-132 Rumsfeld Corporation leased a machine on December 31, 2018, for a t

Question

oblem 15-132

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 $17,500 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $21,500 when its fair value is expected to be $31,500. The machine's estimated useful life is expected to be five years with no residual value. The appropriate interest rate for this lease is 8%.
  

Required:
1. Calculate the amount to be recorded as a right-of-use asset and the associated lease liability.
2. Prepare an amortization schedule for this lease.

n/i PV of $1 PV, ordinary annuity PV, annuity due 1 period, 8% 0.92593 0.92593 1.00000 2 periods, 8% 0.85734 1.78326 1.92593 3 periods, 8% 0.79383 2.57710 2.78326

Explanation / Answer

1)amount to be recorded as a right-of-use asset and the associated lease liability =[PVAD8%,3*Annual payment ]+[PVF8%,3*purchase price]

     =[2.78326*17500]+[.79383*21500]

    = 48707.05+ 17067.35

    =$ 65774.40   [Rounded to 65774]

2)

Amortisaion schedule Year ended Payment Interest Reduction in principal Lease carrying value 31dec 2018 17500 0 17500 65774-17500= 48274 31 dec2019 17500 3861.92 [48274*.08] 17500-3861.92= 13638.08 48274-13638.08= 34635.92 31 dec2020 17500 2770.87 17500-2770.87= 14729.13 34635.92-14729.13=19906.79

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