Question

# Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Metlock Company....

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.

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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

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