Question

Operating Lease, No Lessee Guaranteed Residual Value, Lessee. Beachmont Restaurants, Inc. enters into a lease for standard stoves and grills. The lease term is 3 years with no renewal or purchase options. There is no residual value guarantee, and the lease terms do not provide for a transfer of title. The economic life of the asset is 10 years. According to the terms of the lease contract, Beachmont is required to pay rentals of $700 for the first year with payments increasing by 15% per year for Years 2 and 3. All lease payments are made on January 1. The implicit rate in the lease is 6%. The fair value of the asset is $9,000. Beachmont knows the lessor's implicit rate. Beachmont's fiscal year ends on December 31.

Assume that the lease has been correctly classified as an operating lease

a.       Determine the value of the right to use asset and lease liability at commencement of the lease

b.       For the lease expense recognized each year, determine the amount of interest and amortization that are included in each year’s expense.

Please Show all work in excel.

Answer 1

Beachmont Restaurants, Inc. a. Lease rentals for Year 1 = $700 Lease rental for Year 2 = $700 + (700 * 15%) = $805 Lease rental for Year 3 = $805 + (805 *15%) = $925.75 Lease payments are made on January 1 of each year Calculation of present value of lease payments Discounting Year Lease rentals factor @ 6% Present value 1 $700.00 1 $700.00 2 $805.00 0.943396226 $759.43 $925.75 0.88999644 $823.91 Total present value $2,283.35 3 The value of the right to use asset and lease liability at the commencement the lease = $2,283.35 b. Date Lease Amortization schedule Lease expense Amount of Amortization Outstanding Interest Balance $2,283.35 $700.00 $700.00 $1,583.35 $805.00 $95.00 $710.00 $873.35 $925.75 $52.40 $873.35 $0.00 January1, Year 1 January1, Year 2 January1, Year 3