On January 1, Year 6, Magnus Co. leased a machine to Fisher Co.The machine was acquired by Magnus on January 1, Year 1, for$200,000. The useful life of the machine was 20 years with nosalvage value, and it was depreciated by Magnus using thestraight-line method. The lease term is 10 years, and the presentvalue of the lease payments to be made over the lease term was$90,000. Annual equal lease payments of $14,647 are payable at theend of each year starting December 31, Year 1. The discount ratefor the lease is 10%. Fisher depreciates all of its assets usingthe straight-line method. Assume that both the remaining economiclife of the machine and the salvage value did not change as aresult of the lease.
For each of the following independent situations, enter in thedesignated cells below the appropriate amounts for the carryingamount of the right-of-use asset that should be reported inFisher’s December 31, Year 6, balance sheet. Enter all amounts aspositive values. Round all amounts to the nearest whole number. Ifno entry is necessary, enter a zero (0) or leave the cellblank.
Situation | Carrying amount |
| 1. The ownership of the machine will transfer to Fisher at theend of the lease term. | |
| 2. The lease was classified as an operating lease. | |
| 3. At the inception of the lease, the present value of theminimum lease payments was 95% of the fair value of themachine. | |
| 4. The lease contained a purchase option at the end of thelease term that Fisher is reasonably certain to exercise. Thepresent value of the lease payments includes the exercise price ofthe option, and the discount rate of the lease is 12%. | |
