On January 1, 2018, Digital, Inc. leased heavy machinery from Young Leasing Comp

Question

On January 1, 2018, Digital, Inc. leased heavy machinery from Young Leasing Company. The terms of the lease require annual payments of $10,000 for ten years beginning on December 31, 2018. The interest rate on the lease is 20%. Assume the lease qualifies as a capital lease and Digital, Inc. employs the double-declining balance method to depreciate its assets. Calculate the amount of depreciation expense recorded on the leased a sset in 2020. Enter your answer with two places after the decimal point (i.e., $123,987.60). You will need to use the time value of money table factors posted i n canvas to answer this question. To access these factors, click modules and then scroll to week 12. Click on the link labeled present & future value table factors. No credit will be awarded for this question using a means other than these table factors to answer this question.

Explanation / Answer

As mentioned lease is a capital lease,asset is recorded in the books of lessee and depreciation also charged by LESSEE.

In the books of digital Inc ( LESSEE) asset recorded at

Lower of

Fair value of the asset and

Minimum lease payment (MLP).

Minimum lease payment s= present value of lease rental over a period of time plus guaranteed residual value as per lessee

Present value of MLP:

$10000*4.1930(10 years present value of annuity factor)

= $41,930 is the MLP

We don't know about fair value so minimum lease payment are taken as fair Value and recorded at $41930 in the books of lessee

Depreciation under double declining method:

The double declining balance method is an accelerated depreciation method. Using this method the Book Value at the beginning of each period is multiplied by a fixed Depreciation Rate which is 200% of the straight line depreciation rate, or a factor of 2.

Straight line depreciation rate= 100%/10years useful life

= 10 % per annum

Double declining means 200% of depreciation so 10%*2= 20%

1st year depreciation= $41930*20%= 8386

2 nd year = $41930-8386=33544*20% = 6708

3rd year=(33544-6708)*20%= 5367

4th year=21469*20%= 4293

5 the year = 17176*20%=3435

6th year = 13741*20%= 2748

7th year = 10993*20%=2198

8 the year = 8795*20%=1759

9 th year = 7036*20% =1407

10 the year= 5629*20% = 1125

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