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What is the amount of the reduction in the lease obligation

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Question - On January 1, 2019, Marlene Corp. enters into an agreement with Dietrich Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement:

1. The term of the non-cancellable lease is three years with no renewal option. Payments of $271,622 are due on December 31 of each year.

2. The fair value of the machine on January 1, 2019, is $700,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease.

3. Marlene depreciates all its machinery on a straight-line basis.

4. Marlene's incremental borrowing rate is 10%. Marlene does not have knowledge of the 8% implicit rate used by Dietrich.

5. Immediately after signing the lease, Dietrich discovers that Marlene is the defendant in a lawsuit that is sufficiently material to make collectibility of future lease payments doubtful. Assume the present value of the lease payments is $700,000 at January 1, 2019.

If Marlene accounts for this lease as a finance lease, what is the amount of the reduction in the lease obligation in calendar 2020?

Reference no: EM132514106

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