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.) Effective Interest Decrease in Balance Payments Paymen Jan. 1 2021 2021 2022 2023 2024 2025 2026 16,000 16,000 16,000 16,000 16,000 16,000 12,040 11,763 11,466 11,149 10,809 16,000 3,960 4,237 4,534 4,851 5,191 Outstanding Balance 188,000 172,000 168.040 163,803 159,269 154,418 149,227 2038 2039 2040 2041 16,000 16,000 16,000 25,656 4,309 3,491 2,615 1,678 11,691 12,509 13,385 23,978 49,872 37,363 23,978 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.)

Answer 1

Part 1

Lease term = 20 years (Jan. 1, 2021 – Jan. 1, 2041)

Part 2

Asset’s residual value expected at the end of the lease term = $25656

Part 3

Effective annual interest rate = 12040/172000 = 7%

Part 4

Total of lease payments – United = (16000*20)+25656 = $345656

Part 5

Total of lease payments – NIC = 16000*20 = $320000

Part 6

United’s net investment in the lease at the beginning of the lease = $172000

Part 7

Total effective interest revenue over the term of the lease = 345656-188000 = $157656

Part 8

Right­of­use asset = 16000*11.33560 = $181870

present value of annuity due; n=20, i=7% is 11.33560