A firm, FINLS Inc., leases an asset on 1 Jan 2015. The firm has no other assets

Question

A firm, FINLS Inc., leases an asset on 1 Jan 2015. The firm has no other assets or liabilities. The estimated economic life of the leased asset is five years with an expected salvage value of zero at the end of five years. The asset will be depreciated straight-line over its economic life. The lease has a fixed noncancellable term of five years with lease payments of $6,275 paid at the end of each year. The implicit interest rate on the lease is 6.5% per year. 5. i. How much interest expense will the firm pay in the first year of the lease? ii. How much depreciation expense will the firm record in the first year of the lease?

Explanation / Answer

Lets calculate the value of Lease

Lease amount = Lease payment / annuity factor @6.5% for 5 years

= 6275/4.1557

= $ 26, 076.89

Annuity factor

Schedule for lease

Interest for 1st Year will be $1,695

Depreciation for 1st year = $26,076.89/5

= $5215.38

Disounting factor @6.5% 1 0.9390 2 0.8817 3 0.8278 4 0.7773 5 0.7299 Total 4.1557

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