Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $40,000 over a eight-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 4%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
a. Determine the present value of the lease upon the lease's inception.
b. Create a partial amortization through the first payment on January 1, 2017.
c. If the lessee’s fiscal year is the calendar year, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31?

Answer 1

Solution a:

Present value of lease on inception = $40,000 * Cumulative PV factor at 4% for annuity due for 8 periods

= $40,000 * 7.00205 = $280,082

Solution b:

Lease Amortization Schedule
Date	Lease payments	Interest expense	Reduction in lease liability	Carrying value of lease liability
Beginning of lease				$280,082
1-Jan-17	$40,000	$0	$40,000	$240,082
1-Jan-18	$40,000	$9,603	$30,397	$209,685
1-Jan-19	$40,000	$8,387	$31,613	$178,073
1-Jan-20	$40,000	$7,123	$32,877	$145,196
1-Jan-21	$40,000	$5,808	$34,192	$111,003
1-Jan-22	$40,000	$4,440	$35,560	$75,444
1-Jan-23	$40,000	$3,018	$36,982	$38,461
1-Jan-24	$40,000	$1,538	$38,462	$0

Solution c:

pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31:

Interest expense = $9,603

Depreciation on assets = $280,082/ 8 = $35,010