Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $50,000 over a six-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?

Answer 1

Solution a:

present value of the lease upon the lease's inception = $50,000 * Cumulative PV factor at 5% for 6 periods of annuity due

= $50,000* 5.32948 = $266,474

Slolution b:

Payment Date	Lease payments	Effective interest	Decrease in balance	Lease balance
1-Jan-17				$266,474
1-Jan-17	$50,000	$0	$50,000	$216,474

Solution c:

pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31:

Interest expense = $216,474 * 5% = $10,824

Amortization expense = $266,474 / 6 = $44,412