Question

On January 1, 2021, National Insulation Corporation (NIC) leased equipment from United Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by NIC. Portions of the United Leasing’s lease amortization schedule appear below: (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.) Or Use Intermediate Accounting table if not provided.

Jan. 1	Payments		Effective Interest		Decrease in Balance		Outstanding Balance
2021							264,950
2021	31,000				31,000		233,950
2022	31,000		28,074		2,926		231,024
2023	31,000		27,723		3,277		227,747
2024	31,000		27,330		3,670		224,077
2025	31,000		26,889		4,111		219,966
2026	31,000		26,396		4,604		215,362
—	—		—		—		—
—	—		—		—		—
—	—		—		—		—
2038	31,000		13,062		17,938		90,915
2039	31,000		10,910		20,090		70,825
2040	31,000		8,499		22,501		48,324
2041	54,123		5,799		48,324		0

Required:
1. What is the lease term in years?
2. What is the asset’s residual value expected at the end of the lease term? (Round your answers to nearest whole dollar.)
3. What is the effective annual interest rate? (Round your percentage answer to 1 decimal place.)
4. What is the total amount of lease payments for United? (Round your answers to nearest whole dollar.)
5. What is the total amount of lease payments for NIC? (Round your answers to nearest whole dollar.)
6. What is United’s net investment at the beginning of the lease (after the first payment)? (Round your answers to nearest whole dollar.)
7. What is United’s total effective interest revenue recorded over the term of the lease? (Round your answers to nearest whole dollar.)
8. What amount would NIC record as a right-of-use asset at the beginning of the lease? (Round your answers to nearest whole dollar.)

Answer 1

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Part 1
20 Years	2021 to 2040
Part 2	$                                         54,123
Part 3	$28,074/$233,950	12.00%
Part 4	($31,000*20)+$54,123	$ 674,123
Part 5	($31,000*20)	$ 620,000
Part 6	From Schedule given	$ 233,950
Part 7	$674,123-$264,950	$ 409,173
Part 8	($31,000*)*PV n=20,i=12%
	$31,000*8.3658	$ 259,340