Question

On January 1, 2021, National Insulation Corporation (NIC) leased equipment from United Leasing under a finance...

On January 1, 2021, National Insulation Corporation (NIC) leased equipment from United 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 NIC. Portions of the United Leasing’s lease amortization schedule appear below: (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.)

Jan. 1 Payments Effective Interest Decrease in Balance Outstanding Balance
2021 145,000
2021 12,000 12,000 133,000
2022 12,000 9,310 2,690 130,310
2023 12,000 9,122 2,878 127,432
2024 12,000 8,920 3,080 124,352
2025 12,000 8,705 3,295 121,057
2026 12,000 8,474 3,526 117,531
— — — — —
— — — — —
— — — — —
2038 12,000 4,059 7,941 50,041
2039 12,000 3,503 8,497 41,544
2040 12,000 2,908 9,092 32,452
2041 34,724 2,272 32,452 0


Required:
1. What is the lease term in years?
2. What is the asset’s residual value expected at the end of the lease term? (Round your answers to nearest whole dollar.)
3. What is the effective annual interest rate? (Round your percentage answer to 1 decimal place.)
4. What is the total amount of lease payments for United? (Round your answers to nearest whole dollar.)
5. What is the total amount of lease payments for NIC? (Round your answers to nearest whole dollar.)
6. What is United’s net investment at the beginning of the lease (after the first payment)? (Round your answers to nearest whole dollar.)
7. What is United’s total effective interest revenue recorded over the term of the lease? (Round your answers to nearest whole dollar.)
8. What amount would NIC record as a right-of-use asset at the beginning of the lease? (Round your answers to nearest whole dollar.)

1. Lease term 20 years
2. Asset’s residual value
3. Effective annual interest rate %
4. Lease payments for United
5. Lease payments for NIC $240,000
6. Net investment
7. Total effective interest revenue
8. Right-of-use asset
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Homework Answers

Answer #1

Part 1

Lease term = 20 years (Jan. 1, 2021 – Jan. 1, 2041)

Part 2

Asset’s residual value expected at the end of the lease term = $34,724

Part 3

Effective annual interest rate = 9310/133000 = 7%

Part 4

Total of lease payments – United = (12000*20)+34724 = $274724

Part 5

Total of lease payments – NIC = 12000*20 = $240000

Part 6

United’s net investment in the lease at the beginning of the lease = $133000

Part 7

Total effective interest revenue over the term of the lease = $274724-$145000 = $129724

Part 8

Right­ of ­use asset = 12000*11.33560 = $136027

present value of annuity due; n=20, i=7% is 11.33560

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