Question

Blossom Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $90,500. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Blossom expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020.

Required:
Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved

Answer 1

Answer:

Note: See the attached excel file for the amortization schedule.

Explanation:

In the attached excel file,since the annual rentals are payable on each December 31, the annual Receipt/Payment is calculated using the formula for calculating the present value of an ordinary annuity as follows:

PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)

Where;

PV = Present value or fair value of the machine = $90,500

P = Annual Receipt/Payment = ?

r = Expected return rate = 8%, or 0.08

n = number of years = 3

Substitute the values into equation (1) and solve for P, we have:

$90,500 = P * ((1 - (1 / (1 + 0.08))^3) / 0.08)

$90,500 = P * 2.57709698724788

P = $90,500 / 2.57709698724788

P = $35,177.03