Answered Essay: A lease agreement that qualifies as a finance lease calls for annual lease payments of $36,000 over a four-year lease

A lease agreement that qualifies as a finance lease calls for annual lease payments of $36,000 over a four-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 5%. (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. Complete the amortization schedule for the first two payments.

b. If the lessee’s fiscal year is the calendar year, what would be the amount of the lease liability that the lessee would report in its balance sheet at the end of the first year? What would be the interest payable?

Expert Answer

 

Present value of annuity due of $1:N=4,I=5% is 3.72325

Therefore Beginning Lease Receivable=$36000*3.72325 = $134037

a. (1) (2) (3) (1)+(2)-(3)
Year Beginning Lease Receivable Interest Payments (1)*5% Lease Payment Ending Lease Liability
0 134037 0 36000 98037
1 98037 4902 36000 66939
2 66939 3347 36000 34286
b. The lease liability in the balance sheet will be $98037
Interest Payable will be $4902
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