PROBLEM 1 On 1/1//2015, XYZ leases a machine from Super LeaseCo for four years.

Question

PROBLEM 1 On 1/1//2015, XYZ leases a machine from Super LeaseCo for four years. At the end of the lease term, title passes to XYZ. Payments of $4,000 are made at the BEGINNING of each year 1/1/2015, 12/31/15, 12/31/16, AND 12/31/17). The machine has a useful life of 6 years, with no salvage value. XYZ uses straight-line amortization. Lessee interest rates is 6%. Fair value of machine is $14,692 which is the price that Super LeaseCo. paid for the machine. T&M; Assumption 1 - Record all required entries for XYZ for 2015-2020. Assumption 2 - Assume that the lease is changed so that XYZ must purchase the machine at the end of four years for $400, which is considered a bargain purchase option. The new annual lease payment is S3i4 Recrdall required entries

Explanation / Answer

Assumption 1

Step 1 : Calculation of Present Value of Minimum Lease Payments

For calculating the Present Value of Minimum Lease Payments, we have to use the formula for Present Value of Annuity Due.

The Present Value of Annuity Due formula = PMT* (1-(1/((1+r)^n)))/ r) * (1+r)

Here,

PMT = Amount of each Annuity Payment;

r = Rate of interest

n = No. of Periods over which payment to be made.

In the question, we are given the following data:

PMT = $ 4,000

r = 6%

n = 4 years

P or Present Value of Minimum Lease Payment = 4000* ((1-(1/ (1+6%)^4)))/6%)* (1+6%))

=> 4000* 3.673012 = $ 14,692.05

Step 2 : Create Lease Amortization Schedule

Step 3 : Recording Journal Entries in the Books of XYZ (Lessee)

ASSUMPTION 2

SALE TYPE CAPITAL LEASE PAYMENT WITH BARGAIN PRICE OPTION

Given :

Note:

1. Bargain price paid at the end of the 4 th year

2. Lease Payments paid at the begining of the year

Step 1

Calculation of Lease Liability

The Present Value of Lease Liability is the Present Value of Lease Rentals paid in advance ( Annuity Due) and Present Value of the Bargian Price Option at the end of the 4 th year.

Note :

1. The formula used for Present Value of Annuity Due : Pymnt * ((1-(1/((1+r)^n)))/r) * (1+r) = $ 14,376.17

2. Formula used for Present Value of Bargain Price Option : Bargain Price Option * (1/(1+r)^n) = $ 316.84

Where:

Payment = Pease Payment

r = 6%

n = 4 years

Step 2 : Construction Lease Amortization Table

Step 3 : Journal Entries to record Lease payments ibn the Books of XYZ (Lessee)

Payment $4,000.00 Taxes etc -   Lease portion $4,000.00 Rate * (See Note below) 6% Period 4     PV 14,692 Life of asset 6 Note : * smaller of lessee borrowing rate or lessor implicit rate     LEASE AMORTIZATION SCHEDULE LEASE LEASE LEASE PMT INTEREST REDUCTION LIABILITY $ $ $ $ 1/1/2015- OPENING    14,692.00 1/1/2015 PAYMENT 4,000.00               -          4,000.00    10,692.00 31/12/2015 PAYMENT 4,000.00        641.52        3,358.48      7,333.52 31/12/2016 PAYMENT 4,000.00        440.01        3,559.99      3,773.53 31/12/2017 PAYMENT 4,000.00        226.41        3,773.59           (0.06)

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