J Manufacturing signed an agreement on January 1, 2015 to lease a Machine to ABC
ID: 2766647 • Letter: J
Question
J Manufacturing signed an agreement on January 1, 2015 to lease a Machine to ABC Company. The following information relates to this agreement. 1. The term of lease is 10 years. Non cancellable. 2. The machine has an estimated economic life of 20 years 3. The cost of fair value of the 3,500,000 4. The asset will not revert back to the lessor at the end of the lease at which time the asset is expected to have a residual value of 500,000, which is guaranteed. 5. Executory cost are $1000. ABC assumes direct responsibility for all executory costs. 6. The agreement requires equal annual payments, beginning on January 1, 2015 7. Assume than J manufacturing desires a 10% rate of return on its investment and the barrowing rate is 8% and is known by both parties. A. Calculate the annual payment required B. Calculate the balance on the receivable account of J at the end of year 2
Explanation / Answer
Answer A Cost of assets = $ 3500000 Rate of Return required 10% Cost the machine to ABC Cost 3500000 Rate of Return 10% Total Profit 350000 Cost of Machine To ABC 3850000 Borrowing Cost 8% Annual Payment will be Annual Payment = P*r* ((1+r)^n/(1+r)^n-1) = 3850000*0.08((1+0.08)^10/(1+0.08)^10-1) Annual Payment = $ 573763.50 Answer B Amortization Table Principal Installment interest princi[al repayment Balance 3850000.00 573763.50 308000.00 265763.50 3584236.50 3584236.50 573763.50 286738.92 287024.58 3297211.92 3297211.92 573763.50 263776.95 309986.55 2987225.37 2987225.37 573763.50 238978.03 334785.47 2652439.90 2652439.90 573763.50 212195.19 361568.31 2290871.60 2290871.60 573763.50 183269.73 390493.77 1900377.82 1900377.82 573763.50 152030.23 421733.27 1478644.55 1478644.55 573763.50 118291.56 455471.94 1023172.61 1023172.61 573763.50 81853.81 491909.69 531262.92 531262.92 573763.50 42501.03 531262.47 0.46 At the end of Year 2,receivable in account of 'J' will be $ 3297211.92.
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