Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $50,000 over a four-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 8%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
a. Complete the amortization schedule for the first two payments.
b. If the lessee’s fiscal year is the calendar year, what would be the amount of the lease liability that the lessee would report in its balance sheet at the end of the first year? What would be the interest payable?

Answer 1

Solution a:

Present value of minimum lease payments = $50,000 * Cumulative PV factor at 8% for annuity due for 4 periods

= $50,000 * 3.577097 = $178,855

Amortization Schedule - Lease
Period	Lease payment	Principal Payment	Interest payment	Lease liability
Jan1, Year 1	$50,000	$50,000	$0	$128,855
Jan 1, Year 2	$50,000	$39,692	$10,308	$89,163

Solution b:

Amount of the lease liability that the lessee would report in its balance sheet at the end of the first year = $128,855

Interest payable = $128,855 * 8% = $10,308