Question

Rumsfeld Corporation leased a machine on December 31, 2021, for a three-year period. The lease agreement calls for annual payments in the amount of $15,000 on December 31 of each year beginning on December 31, 2021. Rumsfeld has the option to purchase the machine on December 31, 2024, for $16,000 when its fair value is expected to be $26,000. The machine's estimated useful life is expected to be five years with no residual value. The appropriate interest rate for this lease is 12%. n, i PV of $1 PV, ordinary annuity PV, annuity due 1 period, 12% 0.89286 0.89286 1.00000 2 periods, 12% 0.79719 1.69005 1.89286 3 periods, 12% 0.71178 2.40183 2.69005 Required:

1. Calculate the amount to be recorded as a right-of-use asset and the associated lease liability. 2. Prepare an amortization schedule for this lease.

Answer 1

Yr	Lease Payments	Discounting Factor	PV of lease Payments
1	15,000	1	15,000
2	15,000	0.892857	13,393
3	15,000	0.797194	11,958
	Amount to be recored as ROU Asset / Lease Liability		40,351
Amortization schedule
Yr	Lease Liability	Interest	Amount Paid	Outstanding Amount
1	40,351	-	15,000	25,351
2	25,351	3,042	15,000	13,393
3	13,393	1,607	15,000	-