Question

# On January 1, 2018, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease....

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

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

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