On January 1, 2018, Majestic Mantles leased a lathe from
Equipment Leasing under a finance lease. Lease payments are made
annually. Title does not transfer to the lessee and there is no
purchase option or guarantee of a residual value by Majestic.
Portions of the Equipment Leasing’s lease amortization schedule
|Jan. 1||Payments||Effective Interest||Decrease in Balance||Outstanding Balance|
1. What is Majestic’s lease liability at the
beginning of the lease (after the first payment)?
2. What amount would Majestic record as a right-of-use asset?
3. What is the lease term in years?
4. What is the effective annual interest rate? (Round your percentage answers to 1 decimal place.)
5. What is the total amount of lease payments?
6. What is the total effective interest expense recorded over the term of the lease?
1.) Majestic's Lease Liability:
= Outstanding Lease Balance @ Beginning - Lease payment
= 246,579 - 22,500
2.) Majestic would record the asset @ the cost i.e., the amount of present value of lease balance or the lease balance = 246,579
3.) Lease Term
Since the lease started in 2018 and will end at 2037 = 20 years
4.) Effective Annual Interest Rate
= (Total Interest Paid/Outstanding balance@beginning) x
= (16,806/224,079) x 100
5.) Total Lease payments
= Annual Installments x Number of Lease years
= 22,500 x 20
6.) Total Interest Amount
= Total Lease Payments - Opening Balance@Starting of lease
= 450,000 - 246,579
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