Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $60,000 over a eight-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 4%. The lessor’s fiscal year is the calendar year. The lessor manufactured this asset at a cost of $400,000. (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 price at which the lessor is “selling” the asset (present value of the lease payments).
b. Create a partial amortization table through the second payment on January 1, 2017.
c. What would be the increase in earnings that the lessor would report in its income statement for the year ended December 31, 2016 (ignore taxes)?
Required A Required B Required C Create a partial amortization table through the second payment on January 1, 2017. (Enter all amounts as positive values. Round your answers to nearest whole number.) Date Lease Payment Effective Interest Decrease in Balance 01/01/2016 Outstanding Balance $ 420,123 360,123 314,528 $ $ 0 $ 01/01/2016 01/01/2017 60,000 60,000 60,000 45,595 14,405 < Required A Required C >

Answer 1

a. a. Prosent value of lease option PV Farton based Table = 7.00205 Leare Payament $ 60000 i PV of lease - PVC4%.8.60000, OR 60000 x 7.00205 = $420,123,28 b.) lease amortisation schedule Date Lease Payment Eff Decreere outstando Interest in balo Balance lol - Jan. 16 420123.28 Goooo 80000 360123.28 fal- Jani 17 6oooo 14404.93 45535:07_314528-21 ol- Jan, 16 E&fective interest - 360123.28x4 % 3 14404.93 on c. Import Pretax income related to lease Particulars Amount Interest Expense 14404.93 Depreciation 52515.37 6420123/8) 66920.30 Total Expense