Question

(Lessee Entries and Balance Sheet Presentation, Capital Lease) Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2017. Annual rental payments of \(40,000 are to be made at the beginning of each lease year (December 31). The taxes, insurance, and the maintenance costs are the obligation of the lessee. The interest rate used by the lessor in setting the payment schedule is 9%; Ludwick’s incremental borrowing rate is 10%. Ludwick is unaware of the rate being used by the lessor. At the end of the lease, Ludwick has the option to buy the equipment for \)1, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Ludwick uses the straight-line method of depreciation on similar owned equipment.

Instructions

(d) What amounts would appear on Ludwick’s December 31, 2019, balance sheet relative to the lease arrangement?

Short answer

The total value of the property plant and equipment is $119,138.

Step-by-step solution

Meaning of the Balance sheet

A balance sheet is an effective tool that shows the performance of a business or entity by providing a complete report about the value of assets a company has, and how much liability the company has to pay.

Explaining the amounts that would appear on Ludwick’s December 31, 2019, balance sheet relative to the lease arrangement

LUDWICK STEEL COMPANY Balance Sheet (Partial) December 31, 2019
Property, plant, and equipment		Current liabilities:
Leased equipment	$166,794	Lease liability	$33,058
Less: Accumulated depreciation— capital leases	47,656	Long term liabilities Lease liability	36,362

Note: All the values are mentioned in the amortization schedule