Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $20,000 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 4%. (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:
a. Complete the amortization schedule for the first two payments.
b. If the lessee’s fiscal year is the calendar year, what would be the amount of the lease liability that the lessee would report in its balance sheet at the end of the first year? What would be the interest payable?

omplete the amortization schedule for the first two payments. (Enter all amounts as positive values. Round your answers to the nearest whole dollar.)

	Date Lease Payment Effective Interest Decrease in Balance Outstanding Balance January, Year 1 January, Year 1 $20,000 $0 $20,000 (20,000) January, Year 2 20,000 0

f the lessee’s fiscal year is the calendar year, what would be the amount of the lease liability that the lessee would report in its balance sheet at the end of the first year? What would be the interest payable? (Round your answers to the nearest whole dollar.)

	Lease liability Interest payable

Answer 1

Requirement a:

Amortization schedule
Date	Lease payment	Effective interest	Decrease in Balance	Outstanding Balance
January, Year 1				$92,598
January, Year 1	$20,000	$0	$20,000	$72,598
January, Year 2	$20,000	$2,904	$17,096	$55,502

*Decrease in Balance = Lease payment - Effective interest

**Outstanding balance = Preceding outstanding balance - Decrease in Balance

***Jan.,Year 2 Effective interest = $72,598 x 4% = $2,904

Calculations:

First lease payment	$20,000
Present value of the remaining lease payments	$72,598
[$20,000 x 3.62990 present value annuity factor (4%, 4 years)]
Lease Liability	$92,598

Requirement b:

At the end of the first year,

Lease liability	$72,598
Interest payable	$2,904