Question

On January 1, 2018, National Insulation Corporation (NIC) leased equipment from United 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 NIC. Portions of the United Leasing's lease amortization schedule appear below: (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.) Effective Decrease in outstanding Balance Payments Interest Balance 2018 210,001 192,001 187,441 182,562 177,341 171,755 2018 18,000 2019 18,000 2020 18,000 2021 18,000 18,000 4, 560 4, 879 5,221 5,586 5,977 13,440 13,121 12,779 12,414 12,023 2022 18,000 2023 18,000 165,778 2035 18,000 2036 18,000 2037 18,000 2038 23,064 51,371 4, 538 3, 596 2,588 1,509 13,462 14,404 36,967 15,412 21,555 21,555 Required: 1. What is the lease term in years? 2. What is the asset's residual value expected at the end of the lease term (Round your answers to nearest whole dollar.) 3. What is the effective annual interest rate? (Round your percentage answer to 1 decimal place.) 4. What is the total amount of lease payments for United? (Round your answers to nearest whole dollar.) 5. What is the total amount of lease payments for NIC? (Round your answers to nearest whole dollar.) 6. What is United's net investment at the beginning of the lease (after the first payment)? (Round your answers to nearest whole dollar.) 7. What is United's total effective interest revenue recorded over the term of the lease? (Round your answers to nearest whole dollar.) 8. What amount would NIC record as a right-of-use asset at the beginning of the lease? (Round your answers to nearest whole dollar.)

Answer 1

1. Lease Term =20years

The lease term is the period between 2018 and 2038 which is equal to 20 years

2. Assets residual value at the end of lease term=$ 23064

This is the solution even if not guaranteed as the residual value is expected by the lessor

3.Effective Interest Rate=$ 13440*100/192001=7.00%

4. Total amount of lease payments for United= $18000*20+$23064

                    =$ 383064

The scrap value is included because even if not guaranteed the residual value is expected by the lessor

5. Total amount of lease payments for NIC== $18000*20= $ 3,60,000