Question

LeMond Leasing leases equipment to Costigan Construction. The non-cancelable term is 6 years beginning January 1, 20X1, with equal rental payments of $43,162 paid at the beginning of each year. The equipment’s title transfers to Costigan at the end of the lease term. The fair value of the equipment at the inception of the lease is $215,496 and its cost is $180,496. The equipment has a useful life of 7 years. The lessee’s incremental borrowing rate is 10%, and the lessor’s implicit interest of 8% is not known to the lessee.

a.) What is the amount of Lease Receivable capitalized on the lease origination date?

b.)  Interest revenue for fiscal year 20X1 equals?

c.)  The December 31, 20X1 Lease Receivable carrying value equals?

d.)  The January 1, 20X2 Lease Receivable carrying value equals?

e.)  What would the total amount of income be from the lease for 20X1?  

Answer 1

Requirement a The rate of interest to be considered is lessors implicit rate of interest, i.e., 8% Year Beginning Cash flows PV Annuity Factor 43,162 =1+ PVA (8% , 5 years) =1+ 3.9926 =4,9926 Lease Receivable to be capitalized at the initiation date 2,15,491 (43162 4.9926) Requirement b Lease Ammortization Schedule Installment Principle Closing Opening Principle Year Interest at 8% Adjustment 43,162 $ Principle amount 2,15,491 $ 43,162 $ 0 1,72,329 13,786 $ 1 1,72,329 $ 43,162 29,376 $ 1,42,953 1,42,953 $ S 43,162 $ 11,436 $ 8,898 $ 31,726 $ 2 1,11,227 2 $ 76,963 S 3 27 43 64 76,963 $ 6,157 $ 37,005 $ 39,958 4 43,162 43,162 $ 3,204 $ 39,958 $ 5 39,958 $ Interest revenue for Fiscal Year 20X1 is $ 13,786 Requirement c The December 20X1 carrting value of $ Lease Receivable equals 1,42,953 [215491-43162-(43162-13786)] Requirement d Total Income from Lease for 20X1 is 86,324 (43162+43162)