A lease agreement that qualifies as a finance lease calls for annual lease payme
ID: 2407638 • Letter: A
Question
A lease agreement that qualifies as a finance lease calls for annual lease payments of $50,000 over a four-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 8%. (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. Complete the amortization schedule for the first two payments.
b. If the lessee’s fiscal year is the calendar year, what would be the amount of the lease liability that the lessee would report in its balance sheet at the end of the first year? What would be the interest payable?
Explanation / Answer
Solution a:
Present value of minimum lease payments = $50,000 * Cumulative PV factor at 8% for annuity due for 4 periods
= $50,000 * 3.577097 = $178,855
Solution b:
Amount of the lease liability that the lessee would report in its balance sheet at the end of the first year = $128,855
Interest payable = $128,855 * 8% = $10,308
Amortization Schedule - Lease Period Lease payment Principal Payment Interest payment Lease liability Jan1, Year 1 $50,000 $50,000 $0 $128,855 Jan 1, Year 2 $50,000 $39,692 $10,308 $89,163Related Questions
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