Question

Problem 21A-16 b-e (Part Level Submission) Blue Corporation entered into a lease agreement on January 1, 2017, to provide Crane Company with a piece of machinery. The terms of the lease agreement were as follows. 1. The lease is to be for 3 years with rental payments of $13,500 to be made at the beginning of each year. 2. The machinery has a fair value of $64,000, a book value (depreciable base for the lessor) of $40,000, and an economic life of 8 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value of $25,000, none of which is guaranteed. 4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature. 5. The implicit rate is 6%, which is known by Dawkins 6. Collectibility of the payments is probable. Click here to view the factor table.

Answer 1

Lease Liability is the Present Value of minimum lease rental and guranteed residual value.

ie, 13500* PV @ 0 year + 2 years @ 6% => 13500*(1+1.833) => 38250.80

Amortization of lease liability

Date	annual payment	Interest on lease liability	Reduction of lease liability	Lease liability
01-jan-17				38250.80
1-jan-17	13500	0	13500	24750.80
1-jan-18	13500	1485.05	12014.95	12735.85
1-jan-19	13500	764.15	12735.85	0

Please comment in case of any query regarding the solution.