Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $20,000 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%. (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. Complete the amortization schedule for the first two payments. b. If the lessee's fiscal year is the calendar year, what would be the amount of the lease liability that the lessee would report in its balance sheet at the end of the first year? What would be the interest payable?

Answer 1

Answer:

A)

Date	Lease Payment	Effective Interest	Decrease in Balance	Outstanding Balance
January, Year 1				140,041
January, Year 1	20,000	0	20,000	120,041
January, Year 2	20,000	4,802	15,198	104,843

B)

Lease Liability	$ 140,041
Interest Payable	$ 4802

PV of lease payment = lease liability at the begining= $20000 × PV of annuity due of $1 for 8 years @ 4%

= $20000 × 7.00205

= $140,041

Lease liability at the end of first year = $140,041 - $20000 = $120,041

Interest payable = $120,021× 4% = $ 4802