Question

12) On 1.1.17, Jacob Inc. leased equipment from Sam Co. under a 9-year sales type lease. The equipment had cost $400,000 and an estimated useful life of 15 years. Semiannual lease payments of $44,000 are due every 1.1 and 7.1. The present value of lease payments at 12% is $505,000, which equals the sales price of the equipment. Using double declining method, what amount should Jacob recognize as depreciation on the equipment in the 2nd year?

Answer 1

Lessee records the asset at the amount lesser of its fair value at inception or the present value of lease payments.

Fair value at inception is $400,000 and present value of lease payments is $505,000.

Thus. recorded cost that is lesser of two amounts is $400,000.

Depreciation life is 9 years that is lease period.

Rate of depreciation is = 2/9 *100 = 22.2222%

Depreciation for first year = 400,000 * 22.2222% = 88,888.89

Depreciation for second year = (400,000 - 88,888.89) * 22.2222% = 69,135.80