Question

The Harris Company is the lessee on a four-year lease with the following payments at the end of each year:

Year 1:	$	11,500
Year 2:	$	16,500
Year 3:	$	21,500
Year 4:	$	26,500

An appropriate discount rate is 7 percentage, yielding a present value of $62,927.


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.)

Answer 1

Answer : -

a-1 = 0

a-2 =0

a-3 =$11,500

a-4 = 0

a-5 = 0

b-1 = $62927

b-2 = $62927

b-3 = $7,095

b-4 = $4404.90

b-5 = $15,731.75

.

Explantions :-

Considering an Operating Lease

a-1 . Initial Value of the right-of-use asset.

The initial value of the right-of-use asset would be $ 0. Since in operating lease, ownership rights stay with the lessor, hence no asset is recorded.

a-2 Initial Value of the lease liability.

The initial value of the lease liability would be $ 0. Since the operating lease does not require the lease liability to be recorded in the balance sheet

a-3 Lease expense on the income statement on Year1

The lease expense to be shown in the income statement would be $11,500 in Year 1.

a-4 Interest expense on the income statement on Year1.

The Interest expense to be shown in the income statement would be $0. Since operating lease doesn't require to record any liability in the balance sheet.

a-5 Amortization expense on the income statement on Year1.

The Amortization expense to be shown in the income statement would be $0. Since operating lease doesn't require to record any asset in the balance sheet.

Considering a Finance Lease

b-1 Initial Value of the right-of-use asset

The initial value of the right-of-use asset would be $62927. Under Finance Lease, the asset is recorded at the fair value on commencement of the lease.

b-2 Initial Value of the lease liability

The initial value of the lease liability would be $62,927. Under Finance Lease, lease liability is calculated as the present value of the lease payments over the lease term discounted(as provided in the problem).

b-3 Lease expense on the income statement on Year1

The lease expense to be shown in the income statement would be $7,095.11 in Year 1.

Working: Lease Expense = Lease Payment - Interest for Year 1

Working : Lease Expense = $11,500 - ($62,927*7%)

Working : Lease Expense = $11,500 - $4404.90

Working : Lease Expense = $7095.11

b-4 Interest expense on the income statement on Year1.

The Interest expense to be shown in the income statement would be $4404.90. Working: ($62,927*7%)

b-5 Amortization expense on the income statement on Year1

The Amortization expense to be shown in the income statement would be $15,731.75. Working: ($62,927 / 4 years) Assuming The Harris Company uses the straight-line method for amortization.