In: Accounting
Martinez Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $234,000. The fair value of the asset at January 1, 2017, is $234,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $52,991, none of which is guaranteed. 4. Cole Company assumes direct responsibility for all executory costs. 5. The agreement requires equal annual rental payments, beginning on January 1, 2017. 6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
Prepare an amortization schedule that would be suitable for the lessor for the lease term.
Martinez Leasing Company(Lessor) | ||||
Lease Amortization Schedule | ||||
Date | Annual Lease Payment Plus URV | Interest Receivable | Recovery of Lease | Lease receivable |
01-01-2017 | - | - | - | 2,34,000 |
01-01-2017 | 42,600 | - | 42,600 | 1,91,400 |
01-01-2018 | 42,600 | 19,140 | 23,460 | 1,67,940 |
01-01-2019 | 42,600 | 16,794 | 25,806 | 1,42,134 |
01-01-2020 | 42,600 | 14,213 | 28,387 | 1,13,747 |
01-01-2021 | 42,600 | 11,375 | 31,225 | 82,522 |
01-01-2022 | 42,600 | 8,252 | 34,348 | 48,174 |
12/31/2022 | 52,991 | 4,817 | 48,174 | - |
Total | 3,08,591 | 74,592 | 2,33,999 |
Fair Market Value of leased Equipment = $234,000
Residual Value = $52,991
Period of lease = 6 years
Interest Rate = 10%
Present Value of Residual Value = $52,991 * PV of $1 (10%,
6)
Present Value of Residual Value = $52,991 * 0.56447
Present Value of Residual Value = $29,912
Amount to be recovered through lease payment = Fair Market Value
of leased Equipment - Present Value of Residual Value
Amount to be recovered through lease payment = $234,000 -
$29,912
Amount to be recovered through lease payment = $204,088
Annual Payment required = Amount to be recovered through lease
payment / PV of an Annuity Due of $1 (10%, 6)
Annual Payment required = $204,088 / 4.79079
Annual Payment required = $42,600