Question

Elliott Company leased a delivery truck with a fair value of $85,000 and an estimated useful...

Elliott Company leased a delivery truck with a fair value of $85,000 and an estimated useful life of 8 years from Larson Motors signing a five-year lease on December 30, 2017. The lease begins on January 1, 2018, and Elliott will return the truck to Larson at the conclusion of the lease on Dec 31, 2022. Elliott made an initial lease payment of $12,000 on January 1 of 2018, with the remaining lease payments of the same amount due on January 1 of the remaining four years. The implicit rate of interest on the lease is 4% and is known by Elliott. The lease doesn’t contain a purchase option, incentives, residual value guarantees, or a transfer of ownership and Elliott didn’t incur any initial direct costs related to the lease. Assuming this lease is correctly classified as an operating lease:

What is the amount of the lease liability on January 1, 2018 before the initial lease payment?

What amount of interest expense how much interest expense would be recognized in 2019?

What is the remaining value of the lease liability immediately before the payment on January 1, 2022 (year 5)?

What is the amount of the amortization of the right to use asset that will be recognized in 2020 (year 3)?

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Answer #1

a)The amount of lease liability On january 2018 before initial Lease payment

DATE amount PVF@4% DCF
01-01-18 12000 1 12000
01-01-19 12000 0.9615 11538
01-01-20 12000 0.9245 11094
01-01-21 12000 0.8890 10668
01-01-22 12000 0.8548 10258

Total 55558

b)

     

Year Principal Repayment After repayment Intrest Closing Balance
a b c d = b - c e = d * 4% f = d + e
2018 55,558 12000 43,558 1,742 45,300
2019 45,300 12000 33,300 1,332 34,632
2020 34,632 12000 22,632 905 23,537
2021 23,537 12000 11,537 463 12,000
2022 12,000 12000 - - -   

Interest expense would be recognized in 2019 is 1,332 .

C)

The remaining value of the lease liability immediately before the payment on January 1, 2022 (year 5) is 12,000.

d)

The amount of the amortization of the right to use asset that will be recognized in 2020 (year 3) is 55,558 / 5 = 11,111.6

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