On January 1, 2017, Beard Company purchased a machine for $620,000. The machine

Question

On January 1, 2017, Beard Company purchased a machine for $620,000. The machine is ­expected to have a 10-year life, no residual value, and will be depreciated by the straight-line method. On January 1, 2017, it leased the machine to Child Company for a three-year period at an annual rental of $128,000 to be paid at the end of each year. Beard could have sold the machine for $817,298 instead of leasing it. Child does not know the implicit rate in the lease, but it has an incremental rate of 9%. Child Company has a December 31 reporting year. It adopted early the provisions of ASC 842 on January 1, 2017. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided. Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

Required:

1. What type of lease is this for Child Company?

What are the amounts of the right-of-use asset and lease liability that Child Company should report on its balance sheet at December 31, 2017?

How much rent expense should Child Company recognize in 2017?

TABLE 1 Present Value of $1 Periods 2% 3% 5% 6% 7% 8% 9% 10% 11% 12% 15% 16% 17% 1 0.98039 0.97087 0.96154 0.95238 0.94340 0.93458 0.92593 0.91743 0.90909 0.90090 0.89286 0.86957 0.86207 0.85470 2 0.96117 0.94260 0.92456 0.90703 0.89000 0.87344 0.85734 0.84168 0.82645 0.81162 0.79719 0.75614 0.74316 0.73051 3 0.94232 0.91514 0.88900 0.86384 0.83962 0.81630 0.79383 0.77218 0.75132 0.73119 0.71178 0.65752 0.64066 0.62437 4 0.92385 0.88849 0.85480 0.82270 0.79209 0.76290 0.73503 0.70843 0.68301 0.65873 0.63552 057175 0.55229 0.53365 5 0.90573 0.86261 0.82193 0.78353 0.74726 0.71299 0.68058 0.64993 0.62092 0.59345 0.56743 049718 0.47611 045611 6 0.88797 0.83748 0.79031 0.74622 0.70496 0.66634 0.63017 0.59627 0.56447 0.534640.50663 043233 0.41044 0.38984 7 0.87056 0.81309 0.75992 0.71068 0.66506 0.62275 0.58349 0.54703 0.51316 0.48166 0.45235 0.37594 0.35383 0.33320 8 0.85349 0.78941 0.73069 0.67684 0.62741 0.58201 0.54027 0.50187 0.46651 0.43393 0.40388 0.32690 0.30503 0.28478 9 0.83676 0.76642 0.70259 0.64461 0.59190 0.54393 0.50025 046043 0.42410 0.39092 0.36061 0.28426 0.26295 0.24340 10 0.82035 0.74409 0.67556 0.61391 0.55839 0.50835 0.46319 042241 0.38554 0.35218 0.32197 0.24718 0.22668 0.20804 11 0.80426 0.72242 0.64958 0.58468 0.52679 0.47509 0.42888 0.38753 0.35049 0.31728 0.28748 0.21494 0.19542 0.17781 12 0.78849 0.70138 0.62460 0.55684 0.49697 0.44401 0.39711 0.35553 0.31863 0.28584 0.25668 0.18691 0.16846 0.15197 13 0.77303 0.680950.60057 0.53032 0.46884 0.41496 0.36770 0.32618 0.28966 0.25751 0.22917 0.16253 0.14523 0.12989 14 0.75788 0.66112 0.57748 0.50507 0.44230 0.38782 0.34046 0.29925 0.26333 0.23199 0.20462 0.14133 0.12520 0.11102 15 0.74301 0.64186 0.55526 0.48102 0.41727 0.36245 0.31524 0.27454 0.23939 0.20900 0.18270 0.12289 0.10793 0.09489 16 0.72845 0.623170.53391 0.45811 0.39365 0.33873 0.29189 0.25187 0.21763 0.18829 0.16312 0.10686 0.09304 0.08110 17 0.71416 0.60502 0.51337 0.43630 0.37136 0.31657 0.27027 0.23107 0.19784 0.16963 0.14564 0.09293 0.08021 0.06932 18 0.70016 0.58739 049363 0.41552 0.35034 0.29586 0.25025 0.21199 0.17986 0.15282 0.13004 0.08081 0.06914 0.05925 19 0.68643 0.57029 047464 0.39573 0.33051 0.27651 0.23171 0.19449 0.16351 0.13768 0.11611 0.07027 0.05961 0.05064 20 0.67297 0.55368 045639 0.37689 0.31180 0.25842 0.21455 0.17843 0.14864 0.12403 0.10367 0.06110 0.05139 0.04328 25 0.60953 0.47761 0.37512 0.29530 0.23300 0.18425 0.14602 0.11597 0.09230 0.07361 0.05882 0.03038 002447 0.01974 30 0.55207 0.41199 0.30832 0.23138 0.17411 0.13137 0.09938 0.07537 0.05731 0.04368 0.03338 0.01510 0.01165 0.00900 35 0.50003 0.35538 0.25342 0.18129 0.13011 0.09366 0.06763 0.04899 0.03558 0.02592 0.01894 0.00751 0.00555 0.00411 40 0.45289 0.30656 0.20829 0.14205 0.09722 0.06678 0.04603 0.03184 0.02209 0.01538 0.01075 0.00373 0.00264 0.00187

Explanation / Answer

Solution:

As the question provide, company leased the machine to Child Company for a three-year period at an annual rental of $128,000 to be paid at the end of each year. Also the cost of assets is $ 6,20,000 for Beard compnay.

there are normally two tpes of lease.

1. Financial lease

2. Operating lease

Operating lease :

The main characterstics of operating lease is that the cost of machine is not recovered or say the sum total of present value of all lease rent less than the total cost of machine.

so here in the said question,

The sum total is $ 128000 in each year for three years comes to 3,84,000/-. which is less than 6,20,000/- so no need to compute Present value of lease rent.

So it is Operating lease for Child company.

Further,

Rent Expenses that child company should report will be $ 1,28,000 at December 31,2017.

Lease liability that Child Company should report on its balance sheet at December 31, 2017 will be present value of lease rent to be paid in upcoming two years computed as follows:

Year Amount $ PVF Present value ( Amount $ * PVF)

1 128000 .91 116480

2 128000 .84 107520

Total 224000

Liability as on 31st December will be $ 2,24,000/-

The amounts of the right-of-use asset that Child Company should report on its balance sheet at December 31, 2017 will sum total of present value of lease rent payble in upcoming three years computed as follows:

Year Amount $ PVF Present value ( Amount $ * PVF)

1 128000 .91 116480

2 128000 .84   107520

3 128000 .77 98560

Total 322560

Amount of the right to use asset will be $ 3,22,560/-

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