Question

On January 1, 2019, ABC Company leased office equipment from ZZ, Inc. The lease terms require annual payments of $20,000 for 20 years with the first payment being due on December 31, 2019. The interest rate on the lease is 5%, and ABC will use the double-declining balance method to record the amortization of the leased asset. Assume the equipment had a 25 year remaining useful life at January 1, 2019 and the lease contract requires the equipment to be returned to ZZ, Inc. at the end of the lease. Calculate the amount of amortization expense recorded on the leased asset in 2020.

You will need to use the time value of money table factors

Answer 1

Time span of lease is 20 years

Annual payments - $ 20,000

Interest rate on lease is 5%

PV of Annuity for 20 years @ 5% is 12.4622

On 01/01/2019, Present value of lease obligation/ asset is recorder at $ 249,244 (Annual payments multiplied by PV of annuity for 20 years @ 5%)

Formula for double declining depreciation is 2 X straight line depreciation

straightline depreciation = $ 9,970 (carrying amount/ useful life) ($249,244/25)

Double declining depreciation = 2 * $ 9,970 = $ 19,940

Amount of amortisation recorded on leased asset in 2020 is $ 19,940