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On 1-1-2022, Tarantula Company (lessor) leased some equipment to the Summers Company (lessee). It was a...

On 1-1-2022, Tarantula Company (lessor) leased some equipment to the Summers Company (lessee). It was a 5-year noncancelable lease requiringSummers to pay Tarantula $100,000 every 12-31 during the lease period. The equipment has an estimated residual value of $100,000 at the end of the lease (i.e., 12-31-2026). The equipment has an estimated economic life of 6 years with no expected residual value (i.e., $0) at the end of that time (i.e., 12-31-2027).

Tarantula sets the lease payments so as to earn a 10% annual rate of return; Summers is aware of this rate. This is a finance lease for  Summers Company (lessee).

What will be the reduction in the lease liability forSummers Company (lessee) for 2023 ?

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Answer #1

Estimated right of use asset :[PVA10%,5*annual payment] +[PVF10%,5*Estimated residual value]

        [3.79079*100000]+ [.62092*100000]

          379079+ 62092

            441171

year ending Payment Interest (last carrying value *10%) Reduction in lease liability (Payment- interest) Carrying value at end
2022 100000 44117.1   [441171*.10] 100000-44117.1= 55882.9 441171-55882.9= 385288.1
2023 100000 38528.81   [385288.1*.10] 100000-38528.81= 61471.19

385288.1-61471.19

= 323816.91

the reduction in the lease liability forSummers Company (lessee) for 2023 = 61471.19 (rounded to 61471)

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