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
|Jan. 1||Payments||Effective Interest||Decrease in Balance||Outstanding Balance|
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?
Majestic’s lease liability at the beginning of the lease = $188,211
Amouat would Majestic record as a right-of-use asset = Present value of minimum lease payments = $210,711
Lease term in years = 2018 to 2037 = 20 years
Effective annual interest rate = $18,821/ $188,211 = 10%
Total amount of lease payments = 22500*20 = $450,000
Total effective interest expense recorded over the term of the lease = Total lease payments - Right to use asset recorded at beginning of period
= $450,000 - $210,711 = $239,289
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