Question

Laporte Engineering Company leased a machine on January 1, 2017, under a contract calling for four annual payments of $150,000 on December 31, 2017 through 2020. The machine becomes the property of the lessee after the fourth payment. The machine was predicted to have a service life of six years and no residual value, and the interest rate available to Laporte Engineering was 10% on the day the lease was signed. The machine was delivered on January 10, 2017, and was immediately placed in service.

Required:
1. Determine the initial net liability created by the lease and the cost of the leased asset.

2. Prepare a table showing the calculation of the amount of interest expense allocated to each year the lease is in effect and the carrying amount of the liability at the end of each of those years. (Enter all the amounts as positive values. Do not round intermediate calculations. Round your answers to nearest whole dollar.)

3. Prepare the entry to record the leasing of the machine.

4. Prepare entries that would be made on December 31, 2018, to record the annual depreciation on a straight-line basis, and the recording of the lease payment. Also show how the machine and the lease liability should appear on the December 31, 2018, balance sheet. (Do not round intermediate calculations. Round the final answers to nearest whole dollar. Enter all amounts as positive values.)

Answer 1

1)

Calculation of Present value of Minimum lease payments
Date	Payments	PV factor $ 10%	PV of Minimum lease payments
December 31,2017 (150000*0.90909)	$   1,50,000	0.90909	$              1,36,364
December 31,2018 (150000*0.82645)	$   1,50,000	0.82645	$              1,23,968
December 31,2019 (150000*0.75132)	$   1,50,000	0.75132	$              1,12,698
December 31,2020 (150000*0.68302)	$   1,50,000	0.68302	$              1,02,453
			$              4,75,482

Initial lease liability	$   4,75,482
Cost of leased asset	$   4,75,482

2)

Date	Lease repayment	Interest expense on the unpaid lease liability	Reduction of lease liability	Balance of lease liability
December 31,2017				$ 4,75,482
December 31,2017	$ 1,50,000	$47,548.20 (475482*10%)	$       1,02,452	$ 3,73,030
December 31,2018	$ 1,50,000	$37,303.02 (373030*10%)	$       1,12,697	$ 2,60,333
December 31,2019	$ 1,50,000	$26,033.32 (260333*10%)	$       1,23,967	$ 1,36,367
December 31,2020	$ 1,50,000	$13,636.65 (136367*10%)	$       1,36,363	$                3
Total	$ 6,00,000	$   1,24,521	$       4,75,479

3)

Leased asset	$ 4,75,482
Lease liability		$   4,75,482
(To record lease)

4)

January 1,2017	Leased asset	$        4,75,482
	Lease liability		$       4,75,482
	(To record lease)
December 31,2018	Depreciation (475482/4)	$ 1,18,870.50
	Leased asset		$ 1,18,870.50
	(Deprecation accounted
December 31,2018	Interest expense	$      37,303.02
	Lease liability	$        1,12,697
	Cash		$       1,50,000

Balancesheet December 31,2018 (Partial extract)
Long term liabilities
Lease liability	$           2,60,333
Total	$           2,60,333
Non Current assets
Right of use asset (475482-118870.5*2)	$           2,37,741
Total	$           2,37,741