Problem:
On October 1, 2014, Vaughn, Inc., leased a machine from Fell Leasing Company. The lease qualifies as a capital lease and requires nine annual payments of $10,000 beginning September 30, 2015. The lease specifies a purchase option of $10,000 at September 30, 2023, even though the machine’s estimated value on that date is $30,000. Vaughn’s incremental borrowing rate is 11% and has a calendar year-end for reporting purposes. The machine has a 12-year economic life with zero salvage value.
Required:
1. At what amount should Vaughn record the leased equipment on October 1, 2014?
2. What is the amount of depreciation and interest expense that Vaughn should record for the year ended December 31, 2014, and for the year ended December 31, 2015?
3. How much of the lease liability should be classified as current on December 31, 2014, and December 31, 2015?