Question

MAY GET HELP WITH THE FOLLOWING ASPE RELATED INFORMATION FOR BOTH LESSEE AND LESSOR: 1. WHAT FACTORS GIVEN FROM THE INFORMATION BELOW WILL IDENTIFY THE LEASE CRITERIA? 2. WHICH KIND OF LEASE WOULD THIS BE FOR THE LESSEE AND FOR THE LESSOR? 3. COMPLETE ASTRAIGHT-LINE AMORTIZATION CHART FOR THIS LEASE, PLEASE SHOW YOUR CALCULATIONS. DATA ON THIS 10-YEAR LEASE BEGINNING ON MAY 30TH, 2020: • LESSOR/MANUFACTURING COMPANY IS THE OWNER OF THE ESTIMATED 11-YEAR LIFE EQUIPMENT TO BE LEASED. COST AT THE INCEPTION OF THE LEASE IS ALSO THE FAIR VALUE OF EQUIPMENT IS $185,078 • PAYMENTS DUE AT THE BEGINNING OF EACH YEAR OF THE LEASE ARE $25,250 - HAS A GUARANTEED RESIDUAL VALUE OF $20,000 WHICH IS THE MAXIMUM THE LESSEE WOULD HAVE TO PAY AT THE END OF THE LEASE. . BORROWING RATE IS THE SAME AS THE DISCOUNT RATE INCLUDED IN THE PAYMENTS WHICH IS 9% - LESSEE USES" STRAIGHT-LINE AMORTIZATION" • COLLECTION OF LEASE PAYMENTS IS PREDICTABLE, WITH NO EXTRA COSTS TO BE INCURRED . THE LEASE HAS NO RENEWAL OPTION AND IS TO BE RETURNED TO THE LESSOR AT THE END OF THE LEASE TERM. — 4. IS THE FOLLOWING CORRECT REGARDING THE PRESENT VALUE OF THE FUTURE ANNUITY DUE PAYMENTS FROM THE GIVEN INFORMATION ABOVE? PMT= $25,250 PVFV = $162,046

Answer 1

1)

The factors from the given information that will identify the lease criteria are

A. Life of equipment and its lease period

B. Present value of lease payment and Fair value of asset

Present value of lease payments = $25,250 + $25,250 x Present value annuity factor for 9 years at 9% + $20,000 x Present vakue factor for 10th year at 9%

= $25,250 + $25,250 x 5.99525 + $20,000 x 0.42241

= $185,078.2

Fair value is $185,078

2)

The lease is a Finance lease, as it satisfies two conditions for being a finance lease. One condition being it covers the major portion of the assets useful life (10 out of 11 years). The secondary condition being the present value of lease payments are almost equal to fair value of leased asset.

3)

The asset will be recognised at $185,078 and this will be amortized as expense over its lease term of 10 years.

Amortization expense per year = $185,078/10 = $18,507.8

Asset value amortization chart

Year	Opening balance	Amortization	Closing balance
2020	185,078	10,796.217	174,281.783
2021	174,281.883	18,507.8	155,773.983
2022	155,773.983	18,507.8	137,266.183
2023	137,266.183	18,507.8	118,758.383
2024	118,758.383	18,507.8	100,250.583
2025	100,250.583	18,507.8	81,742.783
2026	81,742.783	18,507.8	63,234.983
2027	63,234.983	18,507.8	44,727.183
2028	44,727.183	18,507.8	26,219.383
2029	26,219.383	18,507.8	7,711.583
2030	7,711.583	7,711.583	0

Note : As we do not know the country of the client, we opt the calander year as accounting year. So for first year only 7 months amortization is provided. (18,507.8 x 7/12 = 10,796.217)

Lease payments and it's Interest expense breakup is not asked in question, so not bifurcated.

4)

The present value of future annuity payments would be = $185,072.2 - $20,000 x 0.42241 (calculated in point 1)

= $176,630

So, the amount mentioned in the question is wrong

(The payments are made at the beginning of each year and not at the end of each year). (You have considered them to paid at end of each year, only then the answe will be $162,046)