Question

Blossom, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $324152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Blossom, Inc.'s incremental borrowing rate is 11% and the rate implicit in the lease (which is known by Blossom, Inc.) is 8%. Assuming that this lease is properly classified as a finance lease, what is the amount of interest expense recorded by Blossom, Inc. in the first year of the asset's life? PV Annuity Due PV Ordinary Annuity 3.57710 8%, 4 periods 3.31213 3.44371 3.10245 11%, 4 periods O $35657 O $85891 $0 оо $66830

Answer 1

Right of use asset is present value of all payments that are payable under lease agreement and present value of purchase price at end.

Payment per year (P) = 324152

number of years (n) =5

implicit rate (r) =8%

Payment are made at end of each year. So it is annuity due.

Present value of annuity due formula =P + P * (1- (1/(1+r)^(n-1)))/r

324152 + (324152*(1-(1/((1+8%)^(5-1))))/8%)

=1397784.539

This is finacial lease. So right of use asset value is $1397784.539

Balance at beginning of year for lease= right of use payment - first payment made

=1397784.539-324152

=1073632.539

interest expenses for 1st year = Beginning year balalnce*implicit rate

=1073632.539*8%

=85890.60312

So interest expenses for 1st year of asset life is $85891

Answer 2

Right of use asset is present value of all payments that are payable under lease agreement and present value of purchase price at end.

Payment per year (P) = 324152

number of years (n) =5

implicit rate (r) =8%

Payment are made at end of each year. So it is annuity due.

Present value of annuity due formula =P + P * (1- (1/(1+r)^(n-1)))/r

324152 + (324152*(1-(1/((1+8%)^(5-1))))/8%)

=1397784.539

This is finacial lease. So right of use asset value is $1397784.539

Balance at beginning of year for lease= right of use payment - first payment made

=1397784.539-324152

=1073632.539

interest expenses for 1st year = Beginning year balalnce*implicit rate

=1073632.539*8%

=85890.60312

So interest expenses for 1st year of asset life is $85891