On January 1, Year 1, a lessee signed a five-year equipment lease with annual payments of...

On January 1, Year 1, a lessee signed a five-year equipment lease with annual payments of $100,000 beginning December 31, Year 1. The lessee treated this transaction as a capital lease. The five lease payments have a present value of $379,000 at January 1, Year 1, based on interest of 10%. What amount should the lessee report as interest expense for the year ended December 31, Year 1?

Expert Solution

Interest expense for the year ended December 31, Year 1 is			$ 37,900.00

Working:

Year	Beginning lease liability		Interest expense	Annual payment	Reduction in principal	Ending lease liability
		a	b=a*10%	c	d=c-b	e=a-d
1		$ 3,79,000.00	$ 37,900.00	$ 1,00,000.00	$ 62,100.00	$ 3,16,900.00
2		3,16,900.00	$ 31,690.00	$ 1,00,000.00	$ 68,310.00	$ 2,48,590.00
3		2,48,590.00	$ 24,859.00	$ 1,00,000.00	$ 75,141.00	$ 1,73,449.00
4		1,73,449.00	$ 17,344.90	$ 1,00,000.00	$ 82,655.10	$ 90,793.90
5		90,793.90	$ 9,206.10	$ 1,00,000.00	$ 90,793.90	0

Total			$ 1,21,000.00	$ 5,00,000.00	$ 3,79,000.00

Note:

Difference in the last year is adjusted with interest expense.

jeff jeffy answered 1 year ago

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