Question

The Harris Company is the lessee on a four-year lease with the following payments at the end of each year:

Year 1:	$	12,500
Year 2:	$	17,500
Year 3:	$	22,500
Year 4:	$	27,500

An appropriate discount rate is 7 percentage, yielding a present value of $66,314.


a-1. If the lease is an operating lease, what will be the initial value of the right-of-use asset?

a-2. If the lease is an operating lease, what will be the initial value of the lease liability?

a-3. If the lease is an operating lease, what will be the lease expense shown on the income statement at the end of year 1?

a-4. If the lease is an operating lease, what will be the interest expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

a-5. If the lease is an operating lease, what will be the amortization expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

b-1. If the lease is a finance lease, what will be the initial value of the right-of-use asset?

b-2. If the lease is a finance lease, what will be the initial value of the lease liability?

b-3. If the lease is a finance lease, what will be the lease expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

b-4. If the lease is a finance lease, what will be the interest expense shown on the income statement at the end of year 1? (Round your answer to the nearest dollar amount.)

b-5. If the lease is a finance lease, what will be the amortization expense shown on the income statement at the end of year 1? (Round your answer to the nearest dollar amount.)

Answer 1

Solution:

Sl No.	Questions	Answers	Calculations
a-1	If the lease is an operating lease, the initial value of the right-of-use asset	$        66,314	Given
a-2	If the lease is an operating lease, the initial value of the lease liability	$        66,314	Given
a-3	If the lease is an operating lease, the lease expense shown on the income statement at the end of year 1	$          4,642	$66,314 * 7/100
a-4	If the lease is an operating lease, the interest expense shown on the income statement at the end of year 1	$                -	Under Operating Lease, interest expenses does not arises
a-5	If the lease is an operating lease, the amortization expense shown on the income statement at the end of year 1	$                -	Under Operating Lease, amortization expenses does not arises
b-1	If the lease is a finance lease, the initial value of the right-of-use asset	$        66,314	Given
b-2	If the lease is a finance lease, the initial value of the lease liability	$        66,314	Given
b-3	If the lease is a finance lease, the lease expense shown on the income statement at the end of year 1	$                -	Under Finance Lease, lease expenses does not arises
b-4	If the lease is a finance lease, the interest expense shown on the income statement at the end of year 1	$          4,642	$66,314 * 7/100
b-5	If the lease is a finance lease, the amortization expense shown on the income statement at the end of year 1	$        16,579	$ 66,314 / 4 years

Note:

1) Right to use asset and lease liability value is nothing but present value of lease payments, which is provided in the question as $ 66,314.

2) Amortization expense is lease liability divided by no.of years of lease.