Stellar Leasing Company leases a new machine that has a cost and fair value of $
ID: 2586358 • Letter: S
Question
Stellar Leasing Company leases a new machine that has a cost and fair value of $88,000 to Sharrer Corporation on a 3-year noncancelable contract. Sharrer Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2017. Stellar Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31. Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved.
Explanation / Answer
Cost of machine = 88000
Life of lease = 3 years
Annual return on investment = 9%
Annual lease rental = 88000/Present value annuity factor (9%, 3)
= 88000/2.5313
= 34764.75
Preparation of Amortisation table:
Year
Opening Balance
Interest
Payment
Closing Balance
1
88000
88000*9% = 7920
34764.75
61155.25
2
61155.25
61155.25*9% = 5503.97
34764.75
31894.47
3
31894.47
2870.28
34764.75
0
Year
Opening Balance
Interest
Payment
Closing Balance
1
88000
88000*9% = 7920
34764.75
61155.25
2
61155.25
61155.25*9% = 5503.97
34764.75
31894.47
3
31894.47
2870.28
34764.75
0
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