Question

On 1/1/2014, Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of $136,000 at the beginning of each year, including $20,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. What amount should Metcalf record as leased liability as of 12/31/2014?

Answer 1

Solution:

Annual lease payment at begining of period exclusing maintenance, insurance and taxes = $136,000 - $20,000 = $116,000

Period of lease = 6 years

Present value of lease payments = Annual lease payment * Cumulative pv factor for annuity due for 6 periods

= $116,000 * 4.99271 = $579,154

Hence value of leased asset will be recorded at $579,154 by metcalf company with lease liability of $579,154 on 01.01.2014.

As amount of $116,000 already paid on 01.01.2014.

Therefore interest expense from 01.01.2014 to 31.12.2014 = ($579,154 - $116,000) * 8% = $37,052

Amount should Metcalf record as leased liability as of 12/31/2014 = $579,154 - $116,000 + $37,052 = $500,206