Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $80,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,800 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,800, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. Assuming that this is classified as an operating lease, how much amortization is recorded on the right-of-use asset in 2019?

Question

Quizplus · Accepted Answer

The correct answer is A.The amortization of the right-of-use asset is calculated as the lease payment multiplied by the implicit rate. In this case, the lease payment is $10,800 and the implicit rate is 4%. Therefore, the amortization of the right-of-use asset in 2019 is $10,800 x 4% = $432. The total amortization for the year is $432 x 12 = $5,184. However, since the lease payment made on December 20, 2018 is for the period from January 1, 2019 to December 31, 2019, only 11/12 of the annual lease payment is recognized in 2019. Therefore, the amortization recorded on the right-of-use asset in 2019 is $5,184 x 11/12 = $11,612.

Leewin Brokerage Enters into a Lease Agreement with Bumble Motors