Question

King Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $52,917 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%. The asset being leased cost Mann $195,000 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)? Comnlete this question by entering vour answers in the tahs halo

Answer 1

1. The seller is selling the asset at $2,45,000.1656.

Year	Cash flow (A)	Discounting Factor 1/(1.04^n)    (B)	Present value C = (A*B)	Interest income to be reported in income statement(A-C)
0(Since First payment is at beginning of the year	52,917.0000	1.0000	52,917	-
1	52,917.0000	0.9615	50,881.7308	2,035.2692
2	52,917.0000	0.9246	48,924.7411	3,992.2589
3	52,917.0000	0.8890	47,043.0203	5,873.9797
4	52,917.0000	0.8548	45,233.6734	7,683.3266
Net Present value of lease payments			2,45,000.1656

2. As per IFRS, the lessor would report present value lease rentals of that year as calculated in the above table as income in the income statement. Also, it will report interest income separately which will the difference between 52,917(Rental amount) and the Present value.