Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment

Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Sage Hill Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2017, is $78,000 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $6,000, none of which is guaranteed. 4. The agreement requires equal annual rental payments of $25,178 to the lessor, beginning on January 1, 2017. 5. The lessee's incremental borrowing rate is 5%. The lessor's implicit rate is 4% and is unknown to the lessee. 6. Sage Hill uses the straight-line depreciation method for all equipment.

Explanation / Answer

Date Annual lease payment Interest on liability Reduction of lease liability Lease liability 1/1/2017 71994 1/1/2017 25178 0 25178 46816 1/1/2018 25178 2341 22837 23979 1/1/2019 25178 1199 23979 0 75534 3540 71994

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