Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $40,000 over a five-year lease term (also the asset's useful life), with the first payment at January 1, 2016, the beginning of the lease. The interest rate is 4%. The lessor's fiscal year is the calendar year. The lessor manufactured this asset at a cost of $132,000. (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.) Required: a. Determine the price at which the lessor is “selling” the asset (present value of the lease payments). b. Create a partial amortization schedule through the second payment on January 1, 2017. c. What would be the increase in earnings that the lessor would report in its income statement for the first year ended December 31 (ignore taxes)? Complete this question by entering your answers in the tabs below. Required A Required B Required C What would be the increase in earnings that the lessor would report in its income statement for the first year ended December 31 (ignore taxes)? (Round your answers to nearest whole number.) Pretax impact on income related to the lease: Total pretax impact on income < Required B Required C >

Answer 1

Solution a:

Price at which lessor selling the asset = Present value of lease payments = $40,000 * cumulative PV factor at 4% for 5 periods of annuity due

= $40,000 * 4.6299 = $185,196

Solution b:

Lease amortization schedule
Date	Annual lease payment	Interest revenue	Reduction of lease receivables	Lease receivables
1-Jan-16				$185,196
1-Jan-16	$40,000	$0	$40,000	$145,196
1-Jan-17	$40,000	$5,808	$34,192	$111,004

Solution c:

Pretax impact on income related to lease
Particulars	Amount
Sales	$185,196.00
Cost of goods sold	-$132,000.00
Interest revenue	$5,808.00
Total pretax impact on income	$59,004.00