Question

Rumsfeld Corporation leased a machine on December 31, 2018, for a three-year period. The lease agreement...

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 $14,000 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $15,500 when its fair value is expected to be $25,500. The machine's estimated useful life is expected to be four years with no residual value. The appropriate interest rate for this lease is 8%.

n/i PV of $1 PV, ordinary annuity PV, annuity due
1 period, 8% .92593 .92593 1.00000
2 periods, 8% .85734 1.78326 1.92593
3 periods, 8% .79383 2.57710 2.78326

  
Required:
1. Calculate the amount to be recorded as a right-of-use asset and the associated lease payable.
2. Prepare Rumsfeld's journal entries for this lease for 2018 and 2019.

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