Question

King Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $51,837 over a five-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 4%. The asset being leased cost Mann $190,000 to produce. (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:
1. Determine the price at which the lessor is “selling” the asset (present value of the lease payments).
2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)?

Answer 1

Price at which the lessor is “selling” the asset is :

Particulars
annual lease payments	$51,837
Term	5years
Interest	4%

Year	Lease Payment	Pv Factor @4%	Amount
0 (payment for 1st year is made in the beginning of the year)	$51,837	1	$51,837
1-4	$51,837	3.6299	188,163
Present value of lease			240,000

2) Amounts related to the lease that the lessor would report in its income statement for the year ended December 31:

Sales Income	$240,000
Interest Income (240,000-51,837)*4%	$7,527
Cost of goods sold	($190,000)
Net effect in Income statement	$57,527