Financial Statement Reporting for a Finance Lease

Reynolds Construction (RC) needs a piece of equipment that costs $120,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 7% with payments due at the end of the year. Alternatively, RC can lease the equipment for $45,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.)

1. What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

$

1. What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent.

$

1. What will RC report as an interest expense at Year 1? Round your answer to the nearest cent. Enter your answer as a positive value.

$

1. What will RC report as an amortization expense at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

$

1. What will RC report as the lease liability at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

$

1. What will RC report as the right-of-use asset at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent.

$

TABLE 19-1 Financial Reporting for Leases IULal tedse experise $10,514 99,410 Source: See the file Ch19 Tool Kit.xls.x. Numbers in the table are shown as rounded values for clarity in reporting. However, unrounded values are used for all calculations. Notes: The lease liability in Year 0 is equal to the initial lease liability. For subsequent years, the lease liability balance is equal to the previous balance plus the imputed interest minus the lease payment. the imputed interest for the end of Year t is equal to the cost of debt (rd) multiplied by the lease liability payment at the beginning of Year t. The right-of-use asset balance for an operating lease is equal to the lease liability balance. dT The lease expense for an operating lease is equal to the lease payment. The right-of-use balance for a finance lease is equal to the previous balance minus the amortization charge. 'The interest expense for a finance lease is equal to the imputed interest . sThe amortization charge for a finance lease is equal to initial right-of-use asset divided by the number of years of the lease