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

Ans: 0

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

jeff jeffy answered 1 week ago

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