\"E21-5 (Type of Lease; Amortization Schedule) Mike Macinski Leasing Company lea
ID: 2491358 • Letter: #
Question
"E21-5 (Type of Lease; Amortization Schedule) Mike Macinski Leasing Company leases a new machine that has a cost and fair value of $95,000 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, 2014. Mike Macinski Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31. Instructions (a) Discuss the nature of the lease arrangement and the accounting method that each party to the lease should apply. (b) Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved."
Explanation / Answer
(a)
Present value of the lease is calculated as under: 95,000/2.531 = 37530
Lessor will recognise this lease as a direct financing lease and will create a lease receivable in books with amount of $95,000 which will be receivable in three anula instalments of $37,530.
(b)
Amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved is shown as under:
Lessor will recognise the interest as revenue and lesse will recognise as expense.
Date Instalment Interest revenue/expense Pricipal-Interest Outstanding 01-01-2014 95,000 31-12-2014 37,530 8550 28,980 66,020 31-12-2015 37,530 5941.8 31,588 34,432 31-12-2016 37,530 3098 34,432 0Related Questions
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