On January 1, 2018, Betty DeRose, Inc. leased office furniture and equipment fro
ID: 2520336 • Letter: O
Question
On January 1, 2018, Betty DeRose, Inc. leased office furniture and equipment from Young Leasing Company. The terms of the lease require annual payments of $50,000 for 10 years with the first payment being due on December 31, 2018. Assume the interest rate on the lease is 10% and the lease qualifies as a capital lease. Betty DeRose depreciates all assets using the double-declining balance method. Calculate the balance in the lease liability account on December 31, 2019 after the second lease payment is made. Use the time value of money factors posted in canvas to answer this question. To access these factors, click modules and then scroll to week 11. Click on the link labeled present & future value table factors. No credit will be awarded for this question using a means other than these table factors to answer this question.
Explanation / Answer
First of all we will calculate the cost of furniture and equipment which is present value of all the lease payments
Present Value Interest Factors for a One-Dollar Annuity Discounted at k= 10 Percent for n= 10 years Periods: PVIFA = [1 - 1/(1 + k)n] / k (as per table)
= 6.1446
So cost of Leased assets = $ 50000* 6.1446 = $ 307230 (This figure Outstanding from inception of lease till 31 December 2018)
As on 31 December 2018
First lease payment =. $ 50000
Interset included in it (307230*10%) = ($ 30723)
Capital payment. =. $ 19277
Outstanding Capital balance of lease as on 1 January 2019
$ 307230 - $ 19277 = $ 287953
As on 31 December 2019 second payment of lease
Lease payment =. $ 50000
Interset included in it (287953*10%) = ($ 28795.3)
Capital payment. =. $ 21204.7
SO BALANCE IN LEASE LIABILITIES ACCOUNT AFTER SECOND LEASE PAYMENTS AS ON 1 st January 2020
$ 287953 - $ 21204.7. = $ 266748.3