Question

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 $17,500 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $21,500 when its fair value is expected to be $31,500. The machine's estimated useful life is expected to be five 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.

Answer 1