Question

Culver Limited has signed a lease agreement with Lantus Corp. to lease equipment with an expected lifespan of eight years, no estimated salvage value, and a cost to Lantus, the lessor of $170,000. The terms of the lease are as follows: • The lease term begins on January 1, 2019, and runs for 5 years. • The lease requires payments of $37,396 at the beginning of each year starting January 1, 2019. • At the end of the lease term, the equipment is to be returned to the lessor. • Lantus' implied interest rate is 5%, while Culver's borrowing rate is 6%. Culver uses straight-line depreciation for similar equipment. The year-end for both companies is December 31. Assume that both companies follow ASPE. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1.

Answer 1

Present value of the minimum lease payments = 37,396 x [ { 1 - ( 1 / 1.05 ) ⁵ } / 0.05 ] * 1.05 = $ 170,000.

Lease amortization table:

Date	Payment	Interest	Principal	Balance
1/1/2019				$ 170,000
1/1/2019	$ 37,396	$ 0	$ 37,396	132,604
1/1/2020	37,396	6,630	30,766	101,838
1/1/2021	37,396	5,092	32,304	69,534
1/1/2022	37,396	3,477	33,919	35,615
1/1/2023	37,396	1,781	35,615	0
	$ 186,980	$ 16,980	$ 170,000

In the books of Culver Limited:

Date	Account Titles	Debit	Credit
2019		$	$
Jan 1	Leased Asset	170,000
	Lease Liability		170,000
	To record inception of the lease
Jan 1	Lease Liability	37,396
	Cash		37,396
	To record lease payment
Dec 31	Interest Expense	6,630
	Interest Payable		6,630
	To record interest expense
Dec 31	Depreciation Expense	34,000
	Accumulated Depreciation: Leased Asset		34,000
	To record depreciation expense