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: $ 11,500
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.)

Solutions

Expert Solution

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.


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