Problem 21A-1 a-c The following facts pertain to a non-cancelable lease agreemen

Question

Problem 21A-1 a-c

The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee.

The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment.

Prepare an amortization schedule that would be suitable for the lessee for the lease term.

Date

Annual Lease
Payment Plus GRV

Commencement date January 1, 2017 Annual lease payment due at the beginning of
   each year, beginning with January 1, 2017 $113,864 Residual value of equipment at end of lease term,
   guaranteed by the lessee $50,000 Expected residual value of equipment at end of lease term $45,000 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at January 1, 2017 $600,000 Lessor’s implicit rate 8 % Lessee’s incremental borrowing rate 8 %

Explanation / Answer

PV of Lease payments = PV(0.08,6,113864,50000,1) PV of Lease payments = ($599,998.42) 600000 (rounded) Prepare an amortization schedule that would be suitable for the lessee for the lease term. Date Opening Annual Lease Payment Interest Principal Closing 1/1/2017 486136 113864 38890.88 74973.12 447245.1 1/1/2017 447245.12 113864 35779.6096 78084.39 411465.5 1/1/2018 411465.5104 113864 32917.24083 80946.76 378548.3 1/1/2019 378548.2696 113864 30283.86157 83580.14 348264.4 1/1/2020 348264.408 113864 27861.15264 86002.85 320403.3 1/1/2021 320403.2554 113864 25632.26043 88231.74 294771 1/1/2022 294770.9949 113864 23581.67959 90282.32 271189.3 12/31/2022 271189.3153 113864 21695.14523 92168.85 249494.2

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