Question

Best Bakers, Inc. enters into a lease for building space with the following terms:

Rental payments of $2,000 initial deposit and then $1,000 due at the end of each month for the first year, $1,200 due at the end of month for the second year and $1,500 due at the end of each month for the third year. There are a total of 37 payments, including the initial payment. The three year lease is classified as a “right of use” operating lease.

Determine the right of use asset and lease liability based on a discount to present value computation of the future cash flows. The appropriate discount rate is 8%.

Prepare an amortization table (in Excel) for the first year (or all three years) that shows the amortization of the liability using the effective interest method. (Copy and paste your Excel table into this document.)

Based on the cash flows provided and the liability amortization table above, determine the amount of amortization for the right of use asset for the first year of the lease.

Answer 1

Payment	Amount	PV		Interest	Principal	Closing balance
1	2000	$40,935.39			2000.00	$38,935.39
2	1000			$259.57	$740.43	$38,194.96
3	1000			$254.63	$745.37	$37,449.59
4	1000			$249.66	$750.34	$36,699.26
5	1000			$244.66	$755.34	$35,943.92
6	1000			$239.63	$760.37	$35,183.54
7	1000			$234.56	$765.44	$34,418.10
8	1000			$229.45	$770.55	$33,647.55
9	1000			$224.32	$775.68	$32,871.87
10	1000			$219.15	$780.85	$32,091.02
11	1000			$213.94	$786.06	$31,304.96
12	1000			$208.70	$791.30	$30,513.66
13	1000			$203.42	$796.58	$29,717.08
14	1200			$198.11	$1,001.89	$28,715.19
15	1200			$191.43	$1,008.57	$27,706.63
16	1200			$184.71	$1,015.29	$26,691.34
17	1200			$177.94	$1,022.06	$25,669.28
18	1200			$171.13	$1,028.87	$24,640.41
19	1200			$164.27	$1,035.73	$23,604.68
20	1200			$157.36	$1,042.64	$22,562.04
21	1200			$150.41	$1,049.59	$21,512.46
22	1200			$143.42	$1,056.58	$20,455.88
23	1200			$136.37	$1,063.63	$19,392.25
24	1200			$129.28	$1,070.72	$18,321.53
25	1200			$122.14	$1,077.86	$17,243.67
26	1500			$114.96	$1,385.04	$15,858.63
27	1500			$105.72	$1,394.28	$14,464.35
28	1500			$96.43	$1,403.57	$13,060.78
29	1500			$87.07	$1,412.93	$11,647.86
30	1500			$77.65	$1,422.35	$10,225.51
31	1500			$68.17	$1,431.83	$8,793.68
32	1500			$58.62	$1,441.38	$7,352.30
33	1500			$49.02	$1,450.98	$5,901.32
34	1500			$39.34	$1,460.66	$4,440.66
35	1500			$29.60	$1,470.40	$2,970.26
36	1500			$19.80	$1,480.20	$1,490.07
37	1500			$9.93	$1,490.07	$0.00

PV =

$40,935.39

Amortization for 1st year = $11218.31 (Sum of first 13 payments)

WORKINGS