Question

The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system. Commencement date Lease term Economic life of leased equipment Residual value at the end of lease term Lessee's incremental borrowing rate Annual lease payment due at the beginning of each year, beginning with October 1, 2017 October 1, 2017 6 years 7 years $0 8.50% $65,000 The collectability of the lease payments is probable by the lessor. The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used by the lessor for all equipment. The lease is to be accounted for properly as a finance lease by the lessee and as a sales-type lease by the lessor. Instructions: Do not show "cents" in your amounts; round up to the nearest dollar. (a) Find the present value of minium lease payments using the appropriate Excel function: The above amount becomes the basis for recording an asset and a liability at the inception of the lease. (b) By referencing to the above PV of minimum lease payments, prepare an amortization schedule for use by the lessee in accounting for this lease. Absolute cell referencing must be used wherever appropriate. Each cell in the table should have either a 0 or a number. Every number, including 0, should have the dollar sign.

Answer 1

(a)

Calculation of Present vaue of Minumum lease payments
Date	Payments	PV factor $ 8.5%	PV of Minmum lease payments
October 1,2017	$       65,000	1	$           65,000
October 1,2018	$       65,000	0.92166	$           59,908
October 1,2019	$       65,000	0.84946	$           55,215
October 1,2020	$       65,000	0.78291	$           50,889
October 1,2021	$       65,000	0.72158	$           46,903
October 1,2022	$       65,000	0.66505	$           43,228
			$       3,21,143

(b)

Date	Lease repayment	Interest expense on the unpaid lease liability	Reduction of the lease liability	Balance of lease liability
October 1, 2017				$ 3,21,143
October 1,2017	$         65,000	$                    -	$     65,000	$ 2,56,143
October 1,2018	$         65,000	$           21,772	$     43,228	$ 2,12,915
October 1,2019	$         65,000	$           18,098	$     46,902	$ 1,66,013
October 1,2020	$         65,000	$           14,111	$     50,889	$ 1,15,124
October 1,2021	$         65,000	$             9,786	$     55,214	$     59,909
October 1,2022	$         65,000	$             5,092	$     59,908	$                2
Total	$     3,90,000	$           68,859	$ 3,21,141

(c)

The total amount of lease payments over the period - $390,000

(d)

The interest expense recorded over the life of lease - $68,859

(e)

(1) Amounts on lesses' income statement for the year-end September 30, 2018

Item	Amount
Interest expense	$        21,772
Lease liability
Depreciataion expense (321143/6)	$        53,524

(2) Amounts on lesses' balance sheet for the year-end September 30, 2018

Current liabilities
Lease liability	$        43,228
Interest paid
Long term liabilities
Lease liability	$    2,12,915
Total	$    2,56,143
Non-Current assets
Right of use asset (321143-53524)	$    2,67,617
Total	$    2,67,617

(3) Amounts on lesses' income statement for the year-end September 30, 2019

Item	Amount
Interest expense	$               18,098
Lease liability
Depreciataion expense (321143/6)	$               53,524

(4) Amounts on lesses' balance sheet for the year-end September 30, 2019

Current liabilities
Lease liability	$               46,902
Interest paid
Long term liabilities
Lease liability	$           1,66,013
Total	$           2,12,915
Non Current assets
Right of use asset (321143-53524*2)	$           2,14,093
Total	$           2,14,093