Question

In: Accounting

Martinez Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company....

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.

Solutions

Expert Solution

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


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