Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Novak Company. The following information relates to this agreement.

1.		The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
2.		The fair value of the asset at January 1, 2017, is $79,900.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $6,300, none of which is guaranteed.
4.		Novak Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $880 to Rocky Mountain Insurance Company for insurance and (2) $1,640 to Laclede County for property taxes.
5.		The agreement requires equal annual rental payments of $18,223.20 to the lessor, beginning on January 1, 2017.
6.		The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee.
7.		Novak Company uses the straight-line depreciation method for all equipment.
.		Novak uses reversing entries when appropriate. (a) Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.) NOVAK COMPANY (Lessee Lease Amortization Schedule AI Annual Lease Payment Interest on Liability Reduction of Lease Liability Lease Liability Date 1/1/17 1/1/17 1/1/18 1/1/19 1/1/20 1/1/21 $

Answer 1

Date 1/1/17 1/1/17 1/1/18 1/1/19 1/1/20 1/1/21 Novak Company (Lessee) Lease Amortization Schedule Reduction Annual Interest of Lease Lease (10%) on Lease Liability Payment Liability Liability $75,988.37 $18,223.20 $18,223.20 $57,765.17 $18,223.20 $5,776.52 $12,446.68 $45,318.49 $18,223.20 $4.531.85 $13,691.35 $31,627.14 $18.223.20 $3.162.71 $15,060.49 $16,566.65 $18,223.20 $1,656.55 $16,566.65 $0.00 $91,116.00 $15.127.63 $75,988.37 Workings: Present Value of minimum lease payments: $75,988.37 (Annual Rental Payment Present Value of an annuity) ($18,223.20 * 4.16987) Present Value of an annuity due (n = 5.1 = 10%) = 4.16987