Rumsfeld Corporation Leased a Machine on December 31, 2018, for a Three-Year

question 180

Essay

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 $16,000 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $20,000 when its fair value is expected to be $40,000. The machine's estimated useful life is expected to be five years with no residual value. The appropriate interest rate for this lease is 12%.
$$\begin{array} { l r r r } \text { n, i } & \text { PV of \$1 } & \text { PV, ordinary annuity } & \text { PV, annuity due } \\\text { 1 period, 12\% } & 0.89286 & 0.89286 & 1.00000 \\\text { 2 periods, 12\% } & 0.79719 & 1.69005 & 1.89286 \\\text { 3 periods, 12\% } & 0.71178 & 2.40183 & 2.69005\end{array}$$
-Required:
Round your answers to the nearest whole dollar amounts.
1. Calculate the amount to be recorded as a right-of-use asset and the associated lease payable.
2. Prepare Rumsfeld's journal entries for this lease for 2018 and 2019.

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Definitions:

Interest-Only Loan

A loan where the borrower pays only the interest on the principal balance for a set term while the principal amount remains unchanged.

Entire Principal

Entire Principal refers to the total amount of a loan or debt that is owed or borrowed, excluding any interest or additional fees.

Future

Financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price.

Prospective Client

An individual or organization that is considered a potential customer and may be interested in the company's products or services.