Question

King Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $59,349 over a five-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 6%. The asset being leased cost Mann $215,000 to produce. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required: 1. Determine the price at which the lessor is “selling” the asset (present value of the lease payments).

2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)?

Answer 1

Solution 1:

Price at which lessor selling the asset = $59,349 * Cumulative PV factor at 6% for 5 periods of annuity due

= $59,349 * 4.46511 = $265,000

Solution 2:

amounts related to the lease that the lessor would report in its income statement for the year ended December 31:

Sales Revenue = $265,000

Cost of goods sold = $215,000

Interest revenue = ($265,000 - $59,349) * 6% = $12,339