Question

On January 1, 2018, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Majestic. Portions of the Equipment Leasing’s lease amortization schedule appear below:

Jan. 1	Payments		Effective Interest		Decrease in Balance		Outstanding Balance
							191,981
2018	20,500		0		20,500		171,481
2018	20,500		17,148		3,352		168,129
2019	20,500		16,813		3,687		164,442
2020	20,500		16,444		4,056		160,386
2021	20,500		16,039		4,461		152,122
2022	20,500		15,212		5,288		146,834
2023	20,500		14,683		5,817		141,017
—	—		—		—		—
—	—		—		—		—
—	—		—		—		—
2035	20,500		5,098		15,402		35,578
2036	20,500		3,558		16,942		18,636
2037	20,500		1,864		18,636		0

Required:

1. What is Majestic’s lease liability at the beginning of the lease (after the first payment)?
2. What amount would Majestic record as a right-of-use asset?
3. What is the lease term in years?
4. What is the effective annual interest rate? (Round your percentage answers to 1 decimal place.)
5. What is the total amount of lease payments?
6. What is the total effective interest expense recorded over the term of the lease?

Answer 1

	Jan. 1	Payments		Effective Interest		Decrease in Balance		Outstanding Balance
								191,981
	2018	20,500		0		20,500		171,481
	2018	20,500		17,148		3,352		168,129
	2019	20,500		16,813		3,687		164,442
	2020	20,500		16,444		4,056		160,386
	2021	20,500		16,039		4,461		152,122
	2022	20,500		15,212		5,288		146,834
	2023	20,500		14,683		5,817		141,017
	—	—		—		—		—
	—	—		—		—		—
	—	—		—		—		—
	2035	20,500		5,098		15,402		35,578
	2036	20,500		3,558		16,942		18,636
	2037	20,500		1,864		18,636		0
	Lease Liability at the beginning of the lease(after first payment=							$171,481
	Amountb recorded as right to use of asset=					$191,981
	Lease terms in years		20	years
	Effective annual intertest rate=17148/171481=					10%
	Total amount of lease payments=				20500*21=	$        430,500
	Total effective interest expense=				(430500-191981)=		$ 238,519