Question

Company A is the Lessee.

Company B is the Lessor.

Company B rents an asset to Company A for a term of 3 years. The economic life of the asset is 3 years. Therefore both Company A and Company B conclude that this lease contract is a Finance lease from Company A’s point of view. At the end of the lease term the asset is expected to have no residual value and so “residual value” is NOT a relevant matter to prepare the Lessee’s accounting.

The lease contract provides that lease payments are made in ADVANCE. The three equal annual Lease payments will be $10,000. You should describe the three years as YEAR 1, YEAR 2 and YEAR 3. You should have the lease payments made on 1/1 of each year and each lease year run from 1/1/ to 12/32

Company B discloses that is implied lease rate is 3%.

Use the following table for any Present Value or Annuity Factors you require for calculations:

Table
	FACTORS
YEAR “n”	PRESENT VALUE of 1 TABLE 6-2		FUTURE VALUE of 1 Table 6-1		PV of ORDINARY ANNUITY of 1 Table 6-4 Payments at End		PV of ANNUITY DUE of 1 Table 6-5 Payments at Beginning
Discount Rates (“j”)	3%	4%	4%	5%	4%	5%	3%	4%
1	.97087	.96154	1.04000	1.05000	.96154	.95238	1.00000	1.00000
2	.94260	.92456	1.08160	1.10250	1.88609	1.85941	1.97087	1.96154
3	.91514	.88900	1.12486	1.15763	2.77509	2.72325	2.91347	2.88609
4	.88849	.85480	1.16986	1.21551	3.62990	3.54595	3.82861	3.77509
5	.86261	.82193	1.21665	1.27628	4.45182	4.32948	4.71710	4.62990

1. Calculate the Present Value of the Lease Payments from Company A’s perspective as of 1/1/YEAR
2. Calculate the annual amortization expense Company A reports in Earnings on the RoU asset for each of the next 3 fiscal years. Assume Straight Line amortization and no salvage value.
3. Prepare an Amortization Table for the Lease Obligation shown by Company A .
4. Prepare a Chart that shows the two amounts of expenses Company A will report in its Income Statement every year for this lease and be sure to add a TOTAL column to show the combined impact.

Answer 1

1. Calculation of present value of lease payments:
Year	Rentals	PVF(3%,years)	Discounted cash flows
Year 1	10,000.00	1.00000	10,000.00
Year 2	10,000.00	0.97087	9,708.74
Year 3	10,000.00	0.94260	9,425.96
Present Value of Lease Payments	29,134.70
2. Annual Amortization expenses in the point of view of Company A:
Present value of lease payments is treated as cost of asset.
Annual amortization cost = 29134.70 / 3years = 9,711.57
this amount should reported in the books of Company A at the end of each year.
3. Amortization table of lease payments:
Years	Opening value	Lease payments	Interest @ 3%	Principle	Closing Value
Year 1	29,134.70	10,000.00	0.00	10,000.00	19,134.70
Year 2	19,134.70	10,000.00	574.04	9,425.96	9,708.74
Year 3	9,708.74	10,000.00	291.26	9,708.74	0.00
4. Chat that shows two amounts in company A 's income statement:
a.	Lease rent amortization principle amount
b.	Interest Expenses