Question

Abert, Inc. signed a five year lease of equipment on January 1, 2021. The lease was classified as an operating lease and has a 7% implicit interest rate. The lease agreement specifies five payments of $20,000 beginning January 1, 2021, and at each December 31st from 2021-2024. At January 1, 2021, Abert recorded a right-of-use asset and lease payable for $87,744.

When adjusting the books at December 31, 2021, what amount of amortization expense should Abert record for the right-of-use asset?

Multiple Choice

• $17,200

• $13,858

• $20,000

• $15,258

Answer 1

Correct option is $15,258

Explanation given below -

Calculation of PV -

Payment No.	Date	Payment in $	Discount rate@7%	Present value
1	01-Jan-21	20,000	1.00000	20,000
2	31-Dec-21	20,000	0.93458	18,692
3	31-Dec-22	20,000	0.87344	17,469
4	31-Dec-23	20,000	0.81630	16,326
5	31-Dec-24	20,000	0.76290	15,258
	Total	100,000		87,744

Lease Amortization schedule -

Lease Amortization schedule	Amount in $
Payment No.	Date	Opening balance of lease payable	Lease payment	Interest expense (opening balance * 7%)	Principal payment (lease payment - interest expense)	closing balance of lease payable (opening balance - principal payment-Interest payment)
1	01-Jan-21	87,744	20,000	-	20,000	67,744
2	31-Dec-21	67,744	20,000	4,742	15,258	52,487
3	31-Dec-22	52,487	20,000	3,674	16,326	36,161
4	31-Dec-23	36,161	20,000	2,531	17,469	18,692
5	31-Dec-24	18,692	20,000	1,308	18,692	0
	Total		100,000	12,256	87,744

On 31st December, 2021, Albert should record $15,258 as right-of-use asset. Highlighted in above table.