Question

Rumsfeld Corporation leased a machine on December 31, 2018, for a three-year period. The lease agreement calls for annual payments in the amount of $17,000 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $21,000 when its fair value is expected to be $31,000. The machine's estimated useful life is expected to be six years with no residual value. The appropriate interest rate for this lease is 10%.
  

n/i	PV of $1			PV, ordinary annuity			PV, annuity due
1 period, 10%		0.90909			0.90909			1.00000
2 periods, 10%		0.82645			1.73554			1.90909
3 periods, 10%		0.75131			2.48685			2.73554

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

1)	PV of $1, n=3, i=10% = .75131
	PV of an annuity due of $1, n=3, i=10% = 2.73554
	PV of payments $17,000 x 2.73554 =	$ 46,504.18
	PV of Purchase Option $21,000 x.75131 =	$ 15,777.51
	Right of use assets / Associated Lease Liability	$        62,282
		A	B	C = A-B	D = C x 10%	E = C+D
2)	Time	Initial value	Lease payment	Balance after payment	Interest Expense	Balance after adding interest
	Dec 31, 2018	$        62,282	17000	$              45,282	4528.169	$                  49,810
	Dec 31, 2019	$        49,810	17000	$              32,810	3280.9859	$                  36,091
	Dec 31, 2020	$        36,091	17000	$              19,091	1909.08449	$                  21,000
	Hint for first row:
	62282 = as calculated above
	17000 = given
	45282 = 62282-17000
	4528 = 45282 x 10%
	49810 = 45282+4528