Question

On January 1, 2021, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Majestic. Portions of the Equipment Leasing’s lease amortization schedule appear below:

Jan. 1	Payments		Effective Interest		Decrease in Balance		Outstanding Balance
							268,653
2021	27,000				27,000		241,653
2022	27,000		21,749		5,251		236,402
2023	27,000		21,276		5,724		230,678
2024	27,000		20,761		6,239		224,439
2025	27,000		20,230		6,800		217,639
2026	27,000		13,691		13,309		204,330
2027	27,000		12,493		14,507		189,823
—	—		—		—		—
—	—		—		—		—
—	—		—		—		—
2038	27,000		6,151		20,849		47,496
2039	27,000		4,275		22,725		24,771
2040	27,000		2,229		24,771		0

Required:
1. What is Majestic’s lease liability at the beginning of the lease (after the first payment)?
2. What amount would Majestic record as a right-of-use asset?
3. What is the lease term in years?
4. What is the effective annual interest rate? (Round your percentage answers to 1 decimal place.)
5. What is the total amount of lease payments?
6. What is the total effective interest expense recorded over the term of the lease?

Answer 1

Solution 1:

Majestic’s lease liability at the beginning of the lease = $241,653

Solution 2:

Right of use asset recorded by Majestic = $268,653

Solution 3:

Lease term in years= 20 years

Solution 4:

effective annual interest rate = $21,749 / $241,653 = 9%

Solution 5:

Total amount of lease payments = $27,000*20 = $540,000

solution 6:

total effective interest expense recorded over the term of the lease = Total lease payments - right of use asset

= $540,000 - $268,653 = $271,347