Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Metlock Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2020, is $56,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $3,000, none of which is guaranteed. 4. The agreement requires equal annual rental payments of $18,479 to the lessor, beginning on January 1, 2020. 5. The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee. 6. Metlock uses the straight-line depreciation method for all equipment. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.

Answer 1

Answer:

Lease Amortization schedule is shown below in the table:

Date	Annual Lease Payment (A)	Interest on liability (5% * Lease liability of previous year) (B)	Reduction of lease liability (C = A-B)	Lease liability (Precious year balance - C)
1/1/20				$52839
1/1/20	$18479	-	$18479	$34360
1/1/21	$18479	$1718	$16761	17599
1/1/22	$18479	$880	$17599	$0
	$55437	$2598	$52839

Present value (PV) of the lease payment is computed using the equation given below:

PV = Annual payment * {1 + PVIFA (r, n)}

= $18479 * {1 + PVIFA (5%, 2)}

= $18479 * {1 + 1.8594}

= $52839