Question

King Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $52,917 over a five-year lease term (also the asset's useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 4%. The asset being leased cost Mann $195,000 to produce. (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: 1. Determine the price at which the lessor is "selling" the asset (present value of the lease payments). 2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)? Complete this question by entering your answers in the tabs below. Required 1 Required 2

Answer 1

Solution 1:

PV Factor based on
Table or Calculator function	PVAD of $1
Lease payment	$52,917
n=	5
i=	4.00%
PV factor	4.62990
Selling price of equipment	$245,000

Solution 2:

Income Statement
For the year ended December 31
Particulars	Amount
Sales revenue	$245,000.00
Cost of goods sold	-$195,000.00
Interest revenue [($245,000 - $52,917)*4%]	$7,683.00
Income statement increase	$57,683.00