Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $25,000 over a six-year lease term (also the asset's useful life), with the first payment at January 1, 2016, the beginning of the lease. Lease payments will occur on January 1 each year thereafter. The interest rate is 5%. (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.) Required: a. Determine the present value of the lease upon the lease's inception. b. Create a partial amortization through the second payment on January 1, 2017 c. If the lessee's fiscal year is the calendar year, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31?

Answer 1

Answer:

Lease liability/receivable

PV $13,323.6917

Schedule:

Beginning    // Payment // Subtotal //Interest // Ending

   13,323.69        2,500   10,823.69‬   541,18    11.364,87

   11.364,87          2,500   8.864,87‬   443,24   9.308,11‬

Income for the first year:

sales revenue 13,323.69

interest revenue    541,18

  Total              13.864,87‬

Explanation:

Lease liability/receivable

$C \times \frac{1-(1+r)^{-time} }{rate}(1+r) = PV$

C 2,500.00

time 6

rate 0.05

$2500 \times \frac{1-(1+0.05)^{-6} }{0.05}(1+0.05) = PV$

PV $13,323.6917

Amortization calculations

P0 less payment_1 = P1

13,323.69 - 2,500 = 10,823.69‬

P1 x (1 + r) = P2

10,823.69 x (1 + 5%) = 11.364,87

P2 less payment_2 = P3

11,364.87 - 2,500 = 8.864,87‬

The lease receivable will be a sales revenue and each interest accrued durign the year an interest revenue