Question

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 appear below:

Jan. 1	Payments		Effective Interest		Decrease in Balance		Outstanding Balance
							246,579
2018	22,500		0		22,500		224,079
2018	22,500		16,806		5,694		218,385
2019	22,500		16,379		6,121		212,264
2020	22,500		15,920		6,580		205,684
2021	22,500		15,426		7,074		198,610
2022	22,500		11,409		11,091		187,519
2023	22,500		10,577		11,923		175,596
—	—		—		—		—
—	—		—		—		—
—	—		—		—		—
2035	22,500		4,388		18,112		40,400
2036	22,500		3,030		19,470		20,930
2037	22,500		1,570		20,930		0

Required:

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.	Lease liability
2.	Right-of-use asset
3.	Lease term		years
4.	Effective annual interest rate		%
5.	Total of lease payments
6.	Total effective interest expense

Answer 1

Answer:

1.) Majestic's Lease Liability:

= Outstanding Lease Balance @ Beginning - Lease payment
= 246,579 - 22,500
= 224,079

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 100
= (16,806/224,079) x 100
= 7.5%

5.) Total Lease payments

= Annual Installments x Number of Lease years
= 22,500 x 20
= 450,000

6.) Total Interest Amount

= Total Lease Payments - Opening Balance@Starting of lease
= 450,000 - 246,579
= 203,421