Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $26,269 over a six-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 5%. The lessor’s fiscal year is the calendar year. The lessor manufactured this asset at a cost of $125,000. (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 amounts related to the lease that the lessor would report in its income statement for the year ended December 31, 2017 (ignore taxes)?

I need C

Answer 1

Solution a:

Present value of lease payment = $26,269 * Cumulative PV factor at 5% for 6 periods of annuity due

= $26,269 * 5.329477

= $140,000

Solution b:

Lease Amortization Schedule
Payment Date	Lease Payments	Effective Interest (5%)	Decrease in Balance	Lease Balance
				$140,000
1-Jan-16	$26,269	$0	$26,269	$113,731
1-Jan-17	$26,269	$5,687	$20,582	$93,149

Solution c:

Amounts related to the lease that the lessor would report in its income statement for the year ended December 31, 2017

= Interest revenue = $93,149*5% = $4,657