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 210,711 2018 22,500 22,500 188,211 2018 22,500 18,821 3,679 184,532 2019 22,500 18,453 4,047 180,485 2020 22,500 18,049 4,451 176,034 2021 22,500 17,603 4,897 171,137 2022 22,500 17,114 5,386 165,751 2023 22,500 16,575 5,925 159,826 — — — — — — — — — — — — — — — 2035 22,500 5,596 16,904 39,051 2036 22,500 3,905 18,595 20,456 2037 22,500 2,046 20,456 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?

Solution 1:

Majestic’s lease liability at the beginning of the lease = \$188,211

Solution 2:

Amouat would Majestic record as a right-of-use asset = Present value of minimum lease payments = \$210,711

Solution 3:

Lease term in years = 2018 to 2037 = 20 years

Solution 4:

Effective annual interest rate = \$18,821/ \$188,211 = 10%

Solution 5:

Total amount of lease payments = 22500*20 = \$450,000

Solution 6:

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

#### Earn Coins

Coins can be redeemed for fabulous gifts.