Question
In: Finance
The Harris Company is the lessee on a four-year lease with the following payments at the...
The Harris Company is the lessee on a four-year lease with the
following payments at the end of each year:
| Year 1: | $ | 11,000 |
| Year 2: | $ | 16,000 |
| Year 3: | $ | 21,000 |
| Year 4: | $ | 26,000 |
An appropriate discount rate is 7 percentage, yielding a present
value of $61,233.
a-1. If the lease is an operating lease, what will
be the initial value of the right-of-use asset?
a-2. If the lease is an operating lease, what will
be the initial value of the lease liability?
a-3. If the lease is an operating lease, what will
be the lease expense shown on the income statement at the end of
year 1?
a-4. If the lease is an operating lease, what will
be the interest expense shown on the income statement at the end of
year 1? (Leave no cells blank – be certain to enter “0”
wherever required.)
a-5. If the lease is an operating lease, what will
be the amortization expense shown on the income statement at the
end of year 1? (Leave no cells blank – be certain to enter
“0” wherever required.)
b-1. If the lease is a finance lease, what will be
the initial value of the right-of-use asset?
b-2. If the lease is a finance lease, what will be
the initial value of the lease liability?
b-3. If the lease is a finance lease, what will be
the lease expense shown on the income statement at the end of year
1? (Leave no cells blank – be certain to enter “0” wherever
required.)
b-4. If the lease is a finance lease, what will be
the interest expense shown on the income statement at the end of
year 1? (Round your answer to the nearest dollar
amount.)
b-5. If the lease is a finance lease, what will be
the amortization expense shown on the income statement at the end
of year 1? (Round your answer to the nearest dollar
amount.)
Solutions
Expert Solution
Please understand the fundamental concept:
- If it's an operating lease, it's like an operating expense. There is no interest or amortization.
- If it's a financing lease, it's like a loan. It will have interest and amortization built in the installment payment.
a-1. If the lease is an operating lease, what will be the initial value of the right-of-use asset?
Ans: Initial value = PV of future lease payments = $
61,233
a-2. If the lease is an operating lease, what will
be the initial value of the lease liability?
Ans: Initial value = PV of future lease payments = $
61,233
a-3. If the lease is an operating lease, what will
be the lease expense shown on the income statement at the end of
year 1?
Lease expense = Year 1 payment of $ 11,000
a-4. If the lease is an operating lease, what will be the interest expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)
Ans: 0
a-5. If the lease is an operating lease, what will be the amortization expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)
Ans: 0
b-1. If the lease is a finance lease, what will be
the initial value of the right-of-use asset?
Initial value = PV of future lease payments = $ 61,233
b-2. If the lease is a finance lease, what will be the initial value of the lease liability?
Initial value of lease liability = PV of future lease payments =
$ 61,233
b-3. If the lease is a finance lease, what will be
the lease expense shown on the income statement at the end of year
1? (Leave no cells blank – be certain to enter “0” wherever
required.)
Lease expense = Year 1 payment = $ 11,000
b-4. If the lease is a finance lease, what will be
the interest expense shown on the income statement at the end of
year 1? (Round your answer to the nearest dollar
amount.)
Interest expense = PV x interest rate = 61,233 x 7%
= 4,286
b-5. If the lease is a finance lease, what will be
the amortization expense shown on the income statement at the end
of year 1? (Round your answer to the nearest dollar
amount.)
Amortization expense = 11,000 - 4,286 = 6,714
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