Question

New lease standards become effective January 1, 2019. These standards affect the accounting for operationg leases. Assume Swift Company acquires a machine with a fairvalue of $100,000 on January 1 of Year 1 by signing a five year lease. Swift must make payments of $16,275 each December 31. The appropriate interest rate on the lease is 10%. Assume that this lease meets the criteria for an operating lease. Compute the following amounts under (a) the lease standard effective before January 1, 2019 and (b) the new lease standards (an amortization table will be useful in solvoing this problem. a. The leased asset at December 31 of each of the first 3 years. b. The lease liability at December 31 of each of the first 3 years. c. Rent expense for each of the first 3 years. d. Interest expense for each of the first 3 years. e. Depreciation expense for each of the first three years.

Answer 1

Fair value of asset to be recorded in books of lessee-

=$16275*present value of annuity factor for 3 years at 10 % rate

=$16275*2.4869(1/1.1+1/(1.1)²+1/(1.1)³)

=$ 40474

depreciation for each year for three years- $13491 ($ 40474/3)

balance of asset at end of first year- $ 40474- $ 13491 = $ 26983

balance of asset at end of second year- $ 26983- $13491 = $ 13492

balance of asset at end of third year- $13492- $13492 = $ 0

interest expense of first year = $40474*10/100 =$ 4047

interest expense of second year= $28246*10/100 = $ 2825

interest expense of third year=$ 14796*10/100 = $ 1479