On January 1, 2018, Digital, Inc. leased heavy machinery from Young Leasing Comp
ID: 2581555 • Letter: O
Question
On January 1, 2018, Digital, Inc. leased heavy machinery from Young Leasing Company. The terms of the lease require annual payments of $10,000 for ten years beginning on December 31, 2018. The interest rate on the lease is 20%. Assume the lease qualifies as a capital lease and Digital, Inc. employs the double-declining balance method to depreciate its assets. Calculate the amount of depreciation expense recorded on the leased a sset in 2020. Enter your answer with two places after the decimal point (i.e., $123,987.60). You will need to use the time value of money table factors posted i n canvas to answer this question. To access these factors, click modules and then scroll to week 12. 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
As mentioned lease is a capital lease,asset is recorded in the books of lessee and depreciation also charged by LESSEE.
In the books of digital Inc ( LESSEE) asset recorded at
Lower of
Fair value of the asset and
Minimum lease payment (MLP).
Minimum lease payment s= present value of lease rental over a period of time plus guaranteed residual value as per lessee
Present value of MLP:
$10000*4.1930(10 years present value of annuity factor)
= $41,930 is the MLP
We don't know about fair value so minimum lease payment are taken as fair Value and recorded at $41930 in the books of lessee
Depreciation under double declining method:
The double declining balance method is an accelerated depreciation method. Using this method the Book Value at the beginning of each period is multiplied by a fixed Depreciation Rate which is 200% of the straight line depreciation rate, or a factor of 2.
Straight line depreciation rate= 100%/10years useful life
= 10 % per annum
Double declining means 200% of depreciation so 10%*2= 20%
1st year depreciation= $41930*20%= 8386
2 nd year = $41930-8386=33544*20% = 6708
3rd year=(33544-6708)*20%= 5367
4th year=21469*20%= 4293
5 the year = 17176*20%=3435
6th year = 13741*20%= 2748
7th year = 10993*20%=2198
8 the year = 8795*20%=1759
9 th year = 7036*20% =1407
10 the year= 5629*20% = 1125