Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $30,000 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%. (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. Determine the present value of the lease upon the lease's inception.
b. Create a partial amortization through the first payment on January 1, 2017.
c. If the lessee’s fiscal year is the calendar year, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31 (ignore taxes)?

a.

PV factors based on
Table or Calculator function:
Lease Payment
n =
i =	_________________
PV of Lease

B.

Date	Lease Payment	Effective Interest	Decrease in balance	Outstanding balance
01/01/2016				______________
01/01/2016
01/01/2017	0	_____	________	(_______)

c.

Impact on pretax income related to the lease:
	_____
Total expenses	_____

Answer 1

1)

Present Value of Lease payment = Lease payment * PV Annuity Due (4%, 5)

Present Value of Lease payment = $30,000 * 4.6299

Present Value of Lease payment = $138,897

2)

Date	Lease payment	Interest expense	Decrease in balance	Outstanding balance
1/1/2016				$138,897
1/1/2016	$30,000	$ -	$30,000	$108,897
1/1/2017	$30,000	$4,356($108,897*4%)	$25,644	$83,253

3)

Pre Tax Income = Sales Revenue - Cost of Goods Sold + Interest Revenue

Pre Tax Income = $138,897- $0 + $4,356

Pre Tax Income = $143,253

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