A lease agreement that qualifies as a finance lease calls for annual lease payme
ID: 2328531 • Letter: A
Question
A lease agreement that qualifies as a finance lease calls for annual lease payments of $24,000 over a four-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 5%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
a. Determine the present value of the lease upon the lease's inception.
b. Create a partial amortization through the first payment on January 1, 2017.
c. If the lessee’s fiscal year is the calendar year, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31?
Explanation / Answer
a. Computation of present value of lease upon lease's inception: Lease payment = $ 24,000 Interest rate = 5% Number of yesrs = 4 year No of lease payments Year Value Flows Present Factor @ 5% Present Value 1 0 $ 24,000 1 $ 24,000 2 1 $ 24,000 0.95238 $ 22,857 3 2 $ 24,000 0.90703 $ 21,769 4 3 $ 24,000 0.86384 $ 20,732 Net Present Value $ 89,358 b. Computation of partial amortization through the first payment on January 1, 2017 : Initial cost = $ 89,358 Less: First lease payment = $ 24,000 Net liability = $ 65,358 Effective interest ($65,358 X 5%) = $ 3,267.90 Date Lease payment Effective interest Decrease in balance Outstanding balance 01-01-2016 $ 89,358 01-01-2016 $ 24,000 0 $ 24,000 $ 65,358 01-01-2017 $ 24,000 $ 3,267.90 $ 20,732.10 $ 44,625.85 c. Computation of impact on pretax income related to lease : Interest Expense = $ 3,268 Amortization expense ($89,358 / 4 years) = $ 22,339 Pre tax earnings shall be reduced by = $ 25,607
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.