Laporte Engineering Company leased a machine on January 1, 2014, under a contract calling for four annual payments of $30,000 on December 31, 2014 through 2017. The machine becomes the property of the lessee after the fourth payment. The machine was predicted to have a service life of six years and no residual value, and the interest rate available to Laporte Engineering was 12% on the day the lease was signed. The machine was delivered on January 10, 2014, and was immediately placed in service.
1. Determine the initial net liability created by the lease and the cost of the leased asset.
2. Prepare a table showing the calculation of the amount of interest expense allocated to each year the lease is in effect and the carrying amount of the liability at the end of each of those years.
3. Prepare the entry to record the leasing of the machine.
4. Prepare entries that would be made on December 31, 2015, to record the annual depreciation on a straight-line basis, and the recording of the lease payment. Also show how the machine and the lease liability should appear on the December 31, 2015, balance sheet.