Leased equipment on January 1, 2007, for 3 years. Lease payments of $100,000 Oth
ID: 2384667 • Letter: L
Question
Leased equipment on January 1, 2007, for 3 years.
Lease payments of $100,000
Other expenses (e.g., insurance, taxes, maintenance) are also to be paid = $2,000 per year.
The lessor did not incur any initial direct costs. The lease contains no purchase or renewal options and the equipment reverts back to Lessor Inc. on the expiration of the lease.
Useful life of the equipment is 4 years.
The fair value of the equipment at lease inception is $265,000.
Lessee has guaranteed $20,000 as the residual value at the end of the lease term.
The salvage value of the equipment is expected to be $2,000 after the end of its economic life.
The lessee’s incremental borrowing rate is 11 percent.
Lessor’s implicit rate is 10 percent and is calculable by the lessee from the lease agreement.
Correct and complete the following amortization schedule for this lease:
Explanation / Answer
year
Cash payment
Interest expense 11%
Reduction lease obligation
Balance of lease obligation
0
$ 244,370
1
100,000
$ 26,881
$ 73119
$ 171 251
2
100,000
$ 26,881
$ 73119
$ 98131
3
100,000
$ 26,881
$ 73119
$ 25012
year
Cash payment
Interest expense 11%
Reduction lease obligation
Balance of lease obligation
0
$ 244,370
1
100,000
$ 26,881
$ 73119
$ 171 251
2
100,000
$ 26,881
$ 73119
$ 98131
3
100,000
$ 26,881
$ 73119
$ 25012
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