Question

On January 1, 2021, Majestic Mantles leased a lathe from Equipment 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 Majestic. Portions of the Equipment Leasing’s lease amortization schedule appear below:

Jan. 1	Payments		Effective Interest		Decrease in Balance		Outstanding Balance
							302,898
2021	29,500				29,500		273,398
2022	29,500		23,239		6,261		267,137
2023	29,500		22,707		6,793		260,344
2024	29,500		22,129		7,371		252,973
2025	29,500		21,503		7,997		244,976
2026	29,500		20,823		8,677		236,298
2027	29,500		20,085		9,415		226,884
—	—		—		—		—
—	—		—		—		—
—	—		—		—		—
2038	29,500		6,404		23,096		52,249
2039	29,500		4,441		25,059		27,190
2040	29,500		2,311		27,189		0

Required:
1. What is Majestic’s lease liability after the first lease payment??
2. What amount would Majestic record as a right-of-use asset?
3. What is the lease term in years?
4. What is the effective annual interest rate? (Round your percentage answers to 1 decimal place.)
5. What is the total amount of lease payments?
6. What is the total effective interest expense recorded over the term of the lease?

	1. Lease liability 2. Right-of-use asset 3. Lease term years 4. Effective annual interest rate % 5. Total of lease payments 6. Total effective interest expense

Answer 1

Solution 1:

Majestic’s lease liability after the first lease payment = $273,398

Solution 2:

Amount would Majestic record as a right-of-use asset = $302,898

Solution 3:

lease term in years = 20 years

Solution 4:

Effective annual interest rate = $23,239 / $273,398 = 8.50%

Solution 5:

Total of lease payments = $29,500*20 = $590,000

Solution 6:

Total effective interest expense = $590,000 - $320,898 = $287,102