Question

On January 1, 2021, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Majestic. Portions of the Equipment Leasing's lease amortization schedule appear below: Effective Interest Jan. 1 Payments 2021 2022 2023 2024 2025 2026 2027 25,500 25,500 25,500 25,500 25,500 25,500 25,500 19,591 19, 119 18,608 18,057 17,461 16,818 Decrease in Outstanding Balance Balance 270, 392 25,500 244,892 5,909 238,983 6,381 232,602 6,892 225,710 7,443 218,267 8,039 210, 228 8,682 201,547 2038 2039 2040 25,500 25,500 25,500 5,257 3,638 1,889 20,243 21,862 23,611 45,474 23, 612 0 Required: 1. What is Majestic's lease liability after the first lease payment?? 2. What amount would Majestic record as a right-of-use asset? 3. What is the lease term in years? 4. What is the effective annual interest rate? (Round your percentage answers to 1 decimal place.) 5. What is the total amount of lease payments? 6. What is the total effective interest expense recorded over the term of the lease?

Answer 1

1)Lease liability after first lease payment = $ 244,892

2)Right of use asset =$ 270,392

3)Lease term in years = 1 Jan 2021 - 31 Dec 2040 =20 years

4)Effective interest rate = Effective interest paid per year/last carrying value

            = 19591 /244892

            = .08 or 8%

5)Total amount of lease payment =paymen per year* number of years

                      = 25500 * 20

                      =$ 510,000

6)Total effective interest recorded over lease term= Total amount of lease payment -initial lease liability

                      = 510000- 270392

                      = 239608