# Rocket Corporation On July 1 of the current year, Rocket Corporation leased a machine from Denver Leasing, Inc. The lease calls for Rocket to make semiannual lease payments of \$239,514 over a five-year lease term on each July 1 and December 31. The first payment is due immediately. Rocket’s incremental borrowing rate is 14%, which the same rate that Denver uses to calculate lease payments. There is no bargain purchase option or residual value. The asset is depreciated using the straight-line basis on December 31 of each year.

Refer to Rocket Corporation.
Required:
1. Determine the present value of the lease at its inception.
2. Determine the amounts related to the lease that Rocket would report in its balance sheet and income statement at December 31 of the current year.
3. Make the appropriate journal entries to record the lease and the related transactions from the inception of the lease through December 31 on Rocket’s books.

What will be an ideal response?

1. The present value of the lease is 239,514 × 7.51523 (PVAD 10 periods @ 7%) = \$1,800,000

2. Balance Sheet Disclosures:
Property, Plant, and Equipment
Leased Asset, net of Accumulated Depreciation \$1,440,000
\$[1,800,000 – (1,800,000 / 5)]
\$[1,800,000 – 360,000] = \$1,440,000

Current Liabilities
Current Portion of Lease Payable 288,558
(\$139,400 + 149,158) = \$288,588
Long-Term Liabilities
Lease Payable, Long-Term portion \$1,141,649

Income Statement Disclosures
Interest Expense \$109,234
Depreciation Expense 360,000

3. Journal entries
July 1
Leased Asset
1,800,000

Lease Payable

1,800,000
Lease Payable
239,514

Cash

239,514

December 31
Lease Payable
130,280

Interest Expense
109,234

Cash

239,514

December 31
Depreciation Expense
360,000

Accumulated Depreciation

360,000

Amortization Schedule
Pmt #
Payment
Interest
Prev Bal × 7%
Principal
Balance

\$1,800,000
7/1
\$239,514
\$ –
\$239,514
\$1,560,486
12/31
\$239,514
109,234
130,280
1,430,206
7/1
\$239,514
100,114
139,400
1,290,806
12/31
\$239,514
90,356
149,158
1,141,649
7/1
\$239,514
79,915
159,599
982,050
12/31
\$239,514
68,744
170,770
811,280
7/1
\$239,514
56,790
182,724
628,555
12/31
\$239,514
43,999
195,515
433,040
7/1
\$239,514
30,313
209,201
223,839
12/31
\$239,514
15,669
223,839
0