Question

On October 1, 2017, Vaughn, Inc., leased a machine from Fell Leasing Company for five years. The lease requires five annual payments of $10,000 beginning September 30, 2018. Vaughn's incremental borrowing rate is 11%, and it uses a calendar year for reporting purposes. The machine has a 12-year economic life with zero salvage value. Vaughn correctly classifies the lease as an operating lease under ASU 2016-02.
a. At what amount should Vaughn record the leased equipment on October 1, 2017? (Round your answer to the nearest whole dollar.)
b. What is the amount of rent expense that Vaughn should record for the year ended December 31, 2017, and for the year ended December 31, 2018?
c. How much of the lease liability should be classified as current on December 31, 2017, and December 31, 2018?

Answer 1

Answer:

Explanation:

1.Amount to be paid Annually to fell leasing Company = $10,000.

Incremental rate of borrowing = 11%

Lease Period = 5 yrs.

2. Value of lease equipment as on 1st October 2017 i.e., date of lease.

= 10,000 * (PVOA) = (11* for 5 years)

=10,000 * 3.6959 (using -PVAF table)

= $ 36,959

Factors are used according to the table of PVAF

3.Lease liability as on 31-12-2017

= 10,000 * PVAD (11 * 4 years) [since 4 years in these)

 = 10,000 * 3.44371

= $ 34,437.10

Lease liability as on 31st Dec 2018

= 10,000 * PVAD (11% 3 years) (still 3 yrs left as on 31-12 -2018)

= 10,000 * 2.71252 = $ 27,125.20