Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $16,000 over a four-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 5%. (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 present value of the lease upon the lease's inception. b. Create a partial amortization through the first payment on January 1, 2017. c. If the lessee's fiscal year is the calendar year, what would be the pretax amounts related to the lease that the lessee 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 B Required A Required C Determine the present value of the lease upon the lease's inception. (Round your answers to nearest whole number and round percentage answer to 1 decimal place.) PV factors based on Table or Calculator function: Lease Payment PV of Lease < Required A Required B >

Answer 1

Answer A
Determination of present value of the lease upon lease inception
Year	Lease Payment	Discount Factor @ 5%	Present Values			PV Factors based on
0	$16000	1.00000	$16000			Table or calculator function
1	$16000	0.95238	$15238			Lease Payment	$16000
2	$16000	0.90703	$14512			n=	4
3	$16000	0.86384	$13821			i=	5%
NPV	$59571
Present Value of Lease =		$59571
Answer B
Partial Amortization through the first payment on January 1,2017
Date	Lease Payment	Effective Interest	Decrease in balance	Outstanding balance
01/01/2016				$59571
01/01/2016	$16000	$0	$16000	$43571
01/01/2017	$16000	$2179	$13821	$29750
Answer C
Impact on pretax income related to the lease:
Income Statement debit side
Interest Expense	$2179
Depreciation Expense	$14893
Total Expenses		$17072
Note : Under finance lease , lessee will also record the depreciation expense on leased asset in Income statement.
We assume the straight line method of depreciation to calculate depreciation expense.
Depreciation per year = Cost of assets (equal to present value of lease payments)/Asset useful life = $59571 / 4 years = $14893