Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $10,000 over a five-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 4%. (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

1. Computation of Present Value of Lease payment

Present Value of Lease payment = Lease payment * PV Annuity Due (4%, 5)

Present Value of Lease payment = $10000 * 4.6299

Present Value of Lease payment = $46299

2. Amortization Table of Lease

3. Pre Tax Amount Lesee will report in income statement

Pre Tax Income = Sales Revenue - Cost of Goods Sold + Interest Revenue

Pre Tax Income = $46299 - $0 + $1452

Pre Tax Income = $47751