Company A is leasing equipment from company B. The lease calls for payment of $5

Question

Company A is leasing equipment from company B. The lease calls for payment of $50,000 a year plus $3,000 a year executory costs for 5 years. the first payment is due on January 1, 2012, when the lease is signed, with the other four payments coming due on December 31 of each year. Company A has also been given the option of purchasing the equipment at the end of the lease at a bargain price of $95,000. Company A has an incremental borrowing rate of 9%, the same as the implicit interest rate of company B. How is the schedule prepared showing how the lease payments will be split between principal and interst and the outstanding lease liability balance over the life of the lease?

Explanation / Answer

Outstanding lease liability per year: Interest Excutory Purchase Total amt Lease 9% Cost Price Due 1-Jan-12 50000 0 3000 0 53000 31-Dec-12 50000 4500 3000 0 57500 31-Dec-13 50000 4500 3000 0 57500 31-Dec-14 50000 4500 3000 0 57500 31-Dec-15 50000 4500 3000 95000 152500 Interest Excutory Purchase Total amt Lease 9% Cost Price Due 1-Jan-12 50000 0 3000 0 53000 31-Dec-12 50000 4500 3000 0 57500 31-Dec-13 50000 4500 3000 0 57500 31-Dec-14 50000 4500 3000 0 57500 31-Dec-15 50000 4500 3000 95000 152500

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