Buffalo Leasing Company leases a new machine that has a cost and fair value of $

Question

Buffalo Leasing Company leases a new machine that has a cost and fair value of $86,000 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, 2017. Buffalo Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31.

(b) Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

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Rent Receipt/ Payment

Interest Revenue/ Expense

Reduction of Principal

Receivable/ Liability

Rent Receipt/ Payment

Interest Revenue/ Expense

Reduction of Principal

Receivable/ Liability

1/1/17 $

$

$

$

12/31/17

12/31/18

12/31/19

Explanation / Answer

Calculation of Instalment amount

Fair value of machine

$86,000

Life 3 years

Required rate of return

9%

Annuity factor @ 9% for 3 years

2.53129

Instalment amount (86,00/2.53129)

$33,975

Schedule

(A)

(B) = (D*9%)

(C)=(A-B)

(D)=(previous balance - C)

Rent Receipt/ Payment

Interest Revenue/ Expense

Reduction of Principal

Receivable/ Liability

1-Jan-17

$86,000.00

31-Dec-17

$33,974.77

$7,740.00

$26,234.77

$59,765.23

31-Dec-18

$33,974.77

$5,378.87

$28,595.90

$31,169.33

31-Dec-19

$33,974.77

$2,805.24

$31,169.53

($0.21)

Calculation of Instalment amount

Fair value of machine

$86,000

Life 3 years

Required rate of return

9%

Annuity factor @ 9% for 3 years

2.53129

Instalment amount (86,00/2.53129)

$33,975

Schedule

(A)

(B) = (D*9%)

(C)=(A-B)

(D)=(previous balance - C)

Rent Receipt/ Payment

Interest Revenue/ Expense

Reduction of Principal

Receivable/ Liability

1-Jan-17

$86,000.00

31-Dec-17

$33,974.77

$7,740.00

$26,234.77

$59,765.23

31-Dec-18

$33,974.77

$5,378.87

$28,595.90

$31,169.33

31-Dec-19

$33,974.77

$2,805.24

$31,169.53

($0.21)

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