Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $16,000 over a four-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%. (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. Determine the present value of the lease upon the lease's inception. b. Create a partial amortization through the first payment on January 1, 2017. c. If the lessee's fiscal year is the calendar year, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31 (ignore taxes)? Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine the present value of the lease upon the lease's inception. (Round your answers to nearest whole number and round percentage answer to 1 decimal place.) PV factors based on Table or Calculator function: Lease Payment i= PV of Lease < Required A Required B >

Answer 1

Ans

a)

Determination of present value of the lease upon lease inception

Year	Lease Payment	Discount Factor @ 5%	Present Values
0	$16,000	1	$16,000
1	$16,000	0.952380952	$15,238
2	$16,000	0.907029478	$14,512
3	$16,000	0.863837599	$13,821
NPV			$59,572

PV Factors based on
Table or calculator function
Lease Payment	$16,000
n=	4
i=	5%
PV of Lease	$59,572

b)

Partial Amortization through the first payment on January 1,2017

Date	Lease Payment	Effective Interest	Decrease in balance	Outstanding balance
1/1/2016				$59,572
1/1/2016	$16,000	$0	$16,000	$43,572
1/1/2017	$16,000	$2,179	$13,821	$29,751

c)

Impact on pretax income related to the lease:

	Income Statement debit side
	Interest Expense	$2,179
	Depreciation Expense	$14,893
	Total Expenses	$17,072

Depreciation per year (SLM Basis) = Cost of assets (equal to present value of lease payments)/Asset useful life = $59,572 / 4 years = $14,893