Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $20,000 over a eight-year lease term (also the asset’s useful life), with the first payment at January 1, 2016, the beginning of the lease. The interest rate is 4%. The lessor’s fiscal year is the calendar year. The lessor manufactured this asset at a cost of $128,000. (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. Determine the price at which the lessor is “selling” the asset (present value of the lease payments). b. Create a partial amortization schedule through the second payment on January 1, 2017. c. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31, 2017 (ignore taxes)?

Answer 1

a. Determination of the price at which the lessor is “selling” the asset (present value of the lease payments) :-
	Present Value of 8 annual lease payments	=	$20,000	+	$20,000	×	PVAD (4%, 7)
		=	$20,000	+	$20,000	×	6.0021
		=	$20,000	+	$120,042
		=	$140,042
	Present value of the lease payments	=	$140,042

b. Creation of a partial amortization through the second payment on January 1, 2017 :-
Amortization Schedule of Lease Receivable
Date	Lease Payment	Interest Revenue	Principal Reduction	Carrying Amount
1/1/2016				$        140,042
1/1/2016	$         20,000	$               -	$      20,000	$        120,042
1/1/2017	$         20,000	$         4,802	$      15,198	$        104,844
1/1/2018	$         20,000	$         4,194	$      15,806	$          89,037
1/1/2019	$         20,000	$         3,561	$      16,439	$          72,599
1/1/2020	$         20,000	$         2,904	$      17,096	$          55,503
1/1/2021	$         20,000	$         2,220	$      17,780	$          37,723
1/1/2022	$         20,000	$         1,509	$      18,491	$          19,232
1/1/2023	$         20,000	$            768	$      19,232	$                 -

c. If the lessee’s fiscal year is the calendar year, what would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31, 2017 (ignore taxes)?

Sr. No.

Particulars

Debit

Credit

2016

Jan.1

Lease Receivable

$140,042

To Asset

$      140,042

(To record lease receivable)

Jan.1

Cash

$ 20,000

To Lease Receivable

$        20,000

(To record receipt of first instalment of lease receivable)

Dec 31

Interest Receivable

$    4,802

To Interest Revenue

$          4,802

(To record interest due on lease receivable)

2017

Jan.1

Cash

$ 20,000

To Lease Receivable

$        15,198

To Interest Receivable

$          4,802

(To record receipt of first instalment of lease receivable)

Dec 31

Interest Receivable

$    4,194

To Interest Revenue

$          4,194

(To record interest due on lease receivable)

Income Statement (Partial) 2017

Interest Revenue

$              4,194

Feel free to ask any clarification, if required. Please provide feedback by thumbs up, if satisfied. It will be highly appreciated. Thank you.