On Jan 2, 2020 Albert Aloysius Zander Equipment, Inc. (AAZEQ) and Mole Excavating (MOLEX) entered into a four-year lease contract for an IVAN-84D, which AAZEQ also offered for sale at $110,000. AAZEQ estimated that each machine could either be refurbished at the end of the lease or scrapped for parts, and that the Residual value of the equipment would thus be $18,000. The economic life of the asset was six years. MOLEX incurred $4,400 in related direct costs for the lease. The lease required payments at the end of each year, commencing Dec 31, 2020. AAZEQ used a 4.7% discount rate and MOLEX’s IBR was 7.2%.
Required: Supply the amounts requested on the answer sheet. If the item description is not applicable to the facts of the problem, put NA in the box.
Implicit rate on the lease:
Lease receivable:
Lease expense:
Lessor gross profit:
Lease liability:
Right of use asset:
Deferred gross profit:
MOLEX is lessor of the contract and accordingly following are Calculations
Implicit rate of return : 7.2%
accordingly PV Factors are as follows:
0.93, 0.87, 0.81, 0.76
Calculation of Annual Installment receivable :
Annual Installment=Cost of Asset / PV
Cost of Asset = 110000+4400= 114400
(Expenses directly Incurred on lease are capitalised)
= 114400/ 3.37
$ 33,927
Calculation of Depreciation = (114400-18000)/4
=24100
Year I Year II Year III Year IV
Lease Receivable 33927 33927 33927 33927
Lease Expenses 24100 24100 24100 24100
Gross Profit 9827 9827 9827 9827
PV 0.93 0.87 0.81 0.76
Present Value 9166 8551 7976 7440
AAZEQ is Lessee of the contract
Following are some Calcuations of Lease Contract
Discount Rate = 4.7%
PV ( 0.96, 0.91, 0.87, 0.83)
Lease Liability will be in books of lessee = PV (Minimum Lease Payment + Guranteed Residual Value)
Annual Installment = Cost of Asset/ PVF
= 110000/ 3.57
= 30805
Particulars Year I Year II Year III Year IV
Annual Installment 30805 30805 30805 30805
PV Factor 0.96 0.91 0.87 0.83
Present Value 29573 28033 26801 25568
Guaranteed Value 18000
PV 0.83
Present Value 14,940
Total 124915 (109975+14940)
Deferred Gross Profit
23,969 ( YearII 8551+Year III 7976+Year III 7440)
On Jan 2, 2020 Albert Aloysius Zander Equipment, Inc. (AAZEQ) and Mole Excavating (MOLEX) entered into...
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