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 10% 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.)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.What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent.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.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.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.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

Present value is the sum of the current value of money of future cash flows. It is also known as a present discounted value, in which the future value of cash inflows and discount rate are known.Calculation of initial Lease Year Lease Payment PV Factor @ 10% Present Value of Cash Flows 1 $55,000 0.90909 $49,999.95 2 $55,000 0.82644 $45,454.20 Total $110,000 $95,454.15 PV factor = 1/(1+i)n Year 1 = 1/(1+0.10)1 = 0.90909 Year 2 = 1/(1+0.10)2 = 0.82644 Hence, the financial lease should be accounted initially with an amount of $95,454.15. Calculation of amortization expenses: Amortization Expenses = $100,000 - $95,454.15 = $4,545.85 Computation of Yearly Amortization Expenses: Yearly amortization expenses = $4,545.85/2 = $2,272.925 Calculation of Each Year Interest and Amortization Expenses Particulars Year 0 ($) Year 1 ($) Year 2 ($) Lease 95,454.15 95,454.15 49,999.95 Interest @10% 9,545.415 4,999.995 Amortization expenses 2,272.925 2,272.925 Lease (55,000) (55,000) Closing balance 95,454.15 52,272.49 2,272.87 (1) Initial lease liabilities are $95,454.15. (2) Initial right-of-use assets is $95,454.15. (3) Interest expenses at the end of Year 1 are $9,545.415. (4) Amortization expenses at the end of Year 1 is $2,272.925. (5) Lease liabilities at the end of Year 1 are $49,999.95. (6) Right-of-use asset at the end of Year 1 = $49,999.95 - $2,272.925 = $47,727.025

Answered: that must be reported on the balance…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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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 10% 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.)

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

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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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. What is the initial right-of-use asset? Do not round intermediate