Question

The Ithaca Company is considering leasing a machine for a period of four years. The cost to buy the machine outright today is $90,000 and the machine has a normal expected economic life of 5 years. The lease payment that is required is based on an annual interest rate of 12% and a residual of $18,000 at the end of the lease. Find the following for year 1 and year 2

Beginning Balance of Lease Liability

Annual Lease Payment

Interest Portion of Lease Payment

Principal Portion of Lease Payment

Ending Balance of Lease Liability

Answer 1

Year	PV factor @ 12%	Remarks
1	0.89286	= 1 / 1.12
2	0.79719	= 0.89286 / 1.12
3	0.71178	= 0.79719 / 1.12
4	0.63552	= 0.71178 / 1.12
Total	3.03735

Cost of New Machine	$        90,000
Less: Present value of purchase option value (18000*0.63552)	$        11,439
Amount recover through annual lease payments	$        78,561
Divided : Total Present Value Factor (as above)	3.03735
Annual lease payments	$        25,865
Initial lease liability (25865*3.03735)	78,561

Interest on Liability = Beginning Lease Liability * 12%

Reduction of Lease Liability = Annual Lease Payment Plus BPO - Interest on Liability

Lease Liability = Beginning Lease Liability - Reduction of Lease Liability

Lessee
Lease Amortization Schedule
Date	Annual Lease Payment	Interest on Liability	Reduction of Lease Liability	Lease Liability
Year 0				$        78,561
Year 1	$                25,865	$           9,427	$            16,438	$        62,123
Year 2	$                25,865	$           7,455	$            18,410	$        43,713
Year 3	$                25,865	$           5,246	$            20,619	$        23,094
Year 4	$                25,865	$           2,771	$            23,094	$                 -

Year	Year 1	Year 2
Beginning Balance of Lease Liability	78,561	62,123
Annual Lease Payment	25,865	25,865
Interest Portion of Lease Payment	9,427	7,455
Principal Portion of Lease Payment	16,438	18,410
Ending Balance of Lease Liability	62,123	43,713