Question

eBook Financial Statement Reporting for a Finance Lease Reynolds Construction (RC) needs a piece of equipment that costs $150,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 6% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) a. What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. b. What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. C. What will RC report as an interest expense at Year 1? Round your answer to the nearest cent. Enter your answer as a positive value. d. What will RC report as an amortization expense at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. e. What will RC report as the lease liability at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. f. What will RC report as the right-of-use asset at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Calculation of Initial Lease Liability:-

year	Lease Payment	PV @7%	PV of Cash Flows
1	55000	.9346	51403
2	55000	.8734	48037
3	55000	.8163	44897
	Total		=144337

Hence the Financial Lease should be accounted initially with an amount of $144337.

Calculation of amortisation expenses=$150000-$144337

=$5663

Hence each year amortisation expenses will be =$5663/3

=$1888

Calulations of Each year interest and amortisation expenses:-

Particulars	Year 0	year1	year2	year3
Lease Liability	144337	144337	99441	51402
Interest @7%		10104	6961	3598
Amortisation Expenses		1888	1888	1888
Lease payments		55000	55000	55000
Closing Balance	144337	99441	51402	0

Therefore Answers to given questions as follows:-

a) Initial Lease Liability is $144337

b) Initial Right of use of asset $142449

c) Interest expenses at the year 1 end $10104

d) Amortisation Expenses at the year 1 end $1888

e) Lease Liability at the year 1 end is $ 99441

f) Right of use of asset at the year 1 end is $ 97553.

Thank You..........