Question

Ajax Inc. has entered into an operating lease that calls for 5 equal payments of $15,000 each year, payable at the beginning of the year. The implicit interest rate of the lease is 3.5 percent per year. The present value of the lease is $70,096.19. If the interest portion of the third $15,000 payment is $1,470.86, what would be the principal portion of that payment and the asset amortization amounts for the second year? Question 4 options:

Answer 1

Operating lease expense is the sum of interest expense and depreciation.

Here depreciation is the present value of the lease divided by no of years in the lease period.

So, the present value of the lease = 70096.19

No of years in the lease period = 5 years

Depreciation per year = 70096.19/5 = 14019.24

Asset amortization amounts for the second year = $14,019.24

As we know the amount of installment = Amount of Principal+Amount of Interest Portion

Value of Installment = $15000

Interest Portion = 1470.86

Principal Portion = Value of Installment - Interest Portion

= 15000-1470.86

= $13529.14

So the answer is Principal: $13,529.14 and Asset Amortization: $14,019.24