Question

Exercise 21-11 (Part Level Submission) Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Monty Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2017, is $79,900. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $6,300, none of which is guaranteed. 4. Monty Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $880 to Rocky Mountain Insurance Company for insurance and (2) $1,640 to Laclede County for property taxes. 5. The agreement requires equal annual rental payments of $18,223.20 to the lessor, beginning on January 1, 2017. 6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee. 7. Monty Company uses the straight-line depreciation method for all equipment. 8. Monty uses reversing entries when appropriate. Click here to view factor tables (a) Your answer is partially correct. Try again. Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.) MONTY COMPANY (Lessee) Lease Amortization Schedule Date Annual Lease Payment Interest on Liability Reduction of Lease Liability Lease Liability 1/1/17 $ $ $ $ 1/1/17 1/1/18 1/1/19 1/1/20 1/1/21 $ $ $

Answer 1

MONTY COMPANY (Lessee)

Lease Amortization Schedule

Date	Annual lease payment	Interest on liability (10%)	Reduction of lease liability	Lease liability
1/1/17				75988.19
1/1/17	18223.20		18223.20	57764.99
1/1/18	18223.20	5776.50	12446.70	45318.29
1/1/19	18223.20	4531.83	13691.37	31626.92
1/1/20	18223.20	3162.69	15060.51	16566.41
1/1/21	18223.20	1656.64	16566.56	0
	91116.00	15127.66	75988.34

17555.01*PVFA(5years 10%) = 18223.20*4.16986 = 75988.19

Interest on liability = previous year lease liability * 10%

Reduction of lease liability = annual lease payment – interest on liability