Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $26,269 over a six-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 5%. If the lessee’s fiscal year is the calendar year, what would be the amounts related to the lease that the lessee would report in its income statement for the first year ended December 31(ignore taxes)?

Answer 1

Since the lease payment is made in advance, the term for calculation purposes would be 5 years instead of 6.
Cumulative Present Value Factor for 5 Years @ 5% (B)				=	4.329
Annual Lease Payments (A)				=	$26,269.00
Total Lease Liability				=	(A*B) + Lease payment at period 0
				=	($26,269 * 4.329) + $26,269
Total Lease Liability				=	$140,000.02
The amortization schedule will look as follows
Period	Cash Paid	Interest paid (on liability o/s at beginning of the period	Principle paid	Liability Balance
				$140,000.02
0	$26,269.00	$0.00	$26,269.00	$113,731.02
1	$26,269.00	$5,686.55	$20,582.45	$93,148.57
2	$26,269.00	$4,657.43	$21,611.57	$71,537.00
3	$26,269.00	$3,576.85	$22,692.15	$48,844.85
4	$26,269.00	$2,442.24	$23,826.76	$25,018.10
5	$26,269.00	$1,250.90	$25,018.10	$0.00
Lease expense in Year 1	=	$5,686.55