Question

On January 1, 2017, Beard Company purchased a machine for $800,000. The machine is expected to have a 10-year life and no residual value. On January 1, 2017, it leased the machine to Ajax Company for a three-year period at an annual rental of $200,000 to be paid at the end of each year. The lease has an implicit interest rate of 8%. Ajax has adopted early the provisions of ASC 842 on January 1, 2017

1-What's the initial value of the lease liability for Ajax, rounded to the nearest dollar?

Group of answer choices

390,994

635,066

0

515,419

600,000

2-

What's the value of the lease liability at the end of 2017, rounded to the nearest dollar?

Group of answer choices

0

356,653

342,936

274,004

400,000

Answer 1

ASC 842 defines that that operating leases are allowed to capitalized unless the lease term is less than 12 months. In our current situation Lease term is 3 years. so we can capitalize the lease liability.

1-What's the initial value of the lease liability for Ajax, rounded to the nearest dollar?

$515,419

Initial Lease Liability = Annual Payment * PVAF(0.08,3)

Initial Lease Liability = 200000 * 2.5771

Initial Lease Liability = $515419 Option D

2. What's the value of the lease liability at the end of 2017, rounded to the nearest dollar?

$356,653

Lease Liability at the end of year 2017 = Initial Lease Liability + Interest - Annual payment

Lease Liability at the end of year 2017 = $515419 + 515419*8% - 200000

Lease Liability at the end of year 2017 = $356653 Option B

Please dont forget to upvote