Rumsfeld Corporation leased a machine on December 31, 2016, for a 3-year period.
ID: 2568007 • Letter: R
Question
Rumsfeld Corporation leased a machine on December 31, 2016, for a 3-year period. The lease agreement calls for annual payments in the amount of $18,500 on December 31 of each year beginning on December 31, 2016. Rumsfeld has the option to purchase the machine on December 31, 2019, for $22,500 when its fair value is expected to be $32,500. The machine's estimated useful life is expected to be six years with no residual value. Rumsfeld uses straight-line depreciation for this type of machinery. The appropriate interest rate for this lease is 12%.
Calculate the amount to be recorded as a leased asset and the associated lease liability.
Prepare an amortization schedule for this lease.
Rumsfeld Corporation leased a machine on December 31, 2016, for a 3-year period. The lease agreement calls for annual payments in the amount of $18,500 on December 31 of each year beginning on December 31, 2016. Rumsfeld has the option to purchase the machine on December 31, 2019, for $22,500 when its fair value is expected to be $32,500. The machine's estimated useful life is expected to be six years with no residual value. Rumsfeld uses straight-line depreciation for this type of machinery. The appropriate interest rate for this lease is 12%.
Explanation / Answer
1. Amount to be recorded as a leased asset and the associated lease liability = (Annual lease payments x PVAD12%,3) + (Bargain purchase price x PV12%,3)
= ($18500 x 2.69005) + ($22500 x 0.71178)
= $65781
2. Amortization Schedule
Year Interest expense Principal Amount O/s 0 $18500 $47281 1 5674 12826 34455 2 4135 14365 20090 3 2410 20090 0Related Questions
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