Chapter 19, Problem 5P

Reynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 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 8% with payments due at the end of the year.

Alternatively, RC can lease the equipment for $55,000 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. a. What is the initial lease liability that must be reported on the balance sheet?
2. b. What is the initial right-of-use asset?
3. c. What will RC report as an interest expense at Year 1?
4. d. What will RC report as an amortization expense at Year 1?
5. e. What will RC report as the lease liability at Year 1?
6. f. What will RC report as the right-of-use asset at Year 1?