Leases Best Bakers, Inc. enters into a lease for building space with the followi
ID: 2402813 • Letter: L
Question
Leases
Best Bakers, Inc. enters into a lease for building space with the following terms:
Rental payment of $2,000 initial deposit and then $1,000 due at the end of each month for the first year, $1,200 due at the end of month for the second year and $1,500 due at the end of each month for the third year. There are a total of 37 payments , including the initial payment. The three year lease is classified as a “right of use” operating lease.
Determine the right of use assets and lease liability based on a discount to present value computation of the future cash flows. The appropriate discount rate is 8%.
Prepare an amortization table for the first year or all three years that shows the amortization of the liability using the effective interest method.
Based on the cash flows provided and the liability amortization table above , determine the amount of amortization for right of use asset for the first year of the lease.
Explanation / Answer
Interest rate 8.000% Monthly rate 0.667% Year Payments PV factor PV 0 2,000 1.000 2,000.00 1 1,000 0.993 993.38 2 1,000 0.987 986.80 3 1,000 0.980 980.26 4 1,000 0.974 973.77 5 1,000 0.967 967.32 6 1,000 0.961 960.92 7 1,000 0.955 954.55 8 1,000 0.948 948.23 9 1,000 0.942 941.95 10 1,000 0.936 935.71 11 1,000 0.930 929.52 12 1,000 0.923 923.36 13 1,200 0.917 1,100.70 14 1,200 0.911 1,093.41 15 1,200 0.905 1,086.17 16 1,200 0.899 1,078.97 17 1,200 0.893 1,071.83 18 1,200 0.887 1,064.73 19 1,200 0.881 1,057.68 20 1,200 0.876 1,050.67 21 1,200 0.870 1,043.71 22 1,200 0.864 1,036.80 23 1,200 0.858 1,029.94 24 1,200 0.853 1,023.12 25 1,500 0.847 1,270.43 26 1,500 0.841 1,262.01 27 1,500 0.836 1,253.65 28 1,500 0.830 1,245.35 29 1,500 0.825 1,237.10 30 1,500 0.819 1,228.91 31 1,500 0.814 1,220.77 32 1,500 0.808 1,212.69 33 1,500 0.803 1,204.66 34 1,500 0.798 1,196.68 35 1,500 0.793 1,188.75 36 1,500 0.787 1,180.88 Total 40,935.39 Total Right 40,935 AmortiZation Schedule Principal Interest Repayment Outstanding 0 40,935 - (2,000) 38,935 1 38,935 260 (1,000) 38,195 2 38,195 255 (1,000) 37,450 3 37,450 250 (1,000) 36,699 4 36,699 245 (1,000) 35,944 5 35,944 240 (1,000) 35,184 6 35,184 235 (1,000) 34,418 7 34,418 229 (1,000) 33,648 8 33,648 224 (1,000) 32,872 9 32,872 219 (1,000) 32,091 10 32,091 214 (1,000) 31,305 11 31,305 209 (1,000) 30,514 12 30,514 203 (1,000) 29,717 13 29,717 198 (1,200) 28,715 14 28,715 191 (1,200) 27,707 15 27,707 185 (1,200) 26,691 16 26,691 178 (1,200) 25,669 17 25,669 171 (1,200) 24,640 18 24,640 164 (1,200) 23,605 19 23,605 157 (1,200) 22,562 20 22,562 150 (1,200) 21,512 21 21,512 143 (1,200) 20,456 22 20,456 136 (1,200) 19,392 23 19,392 129 (1,200) 18,322 24 18,322 122 (1,200) 17,244 25 17,244 115 (1,500) 15,859 26 15,859 106 (1,500) 14,464 27 14,464 96 (1,500) 13,061 28 13,061 87 (1,500) 11,648 29 11,648 78 (1,500) 10,226 30 10,226 68 (1,500) 8,794 31 8,794 59 (1,500) 7,352 32 7,352 49 (1,500) 5,901 33 5,901 39 (1,500) 4,441 34 4,441 30 (1,500) 2,970 35 2,970 20 (1,500) 1,490 36 1,490 10 (1,500) 0
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