Question

Mac Leasing Company (lessor) and Ash Corporation (lessee) signed a four-year lease on January 1, 2020. The underlying asset has an estimated life of six years, and the property reverts to Mac at the end of the lease term. Lease payments of $34,577 are payable on January 1 of each year and were set to yield Mac a return of 8%, which was known to Ash. The estimated residual value at the end of the lease term is $29,000 and is guaranteed by Ash Corporation. Ash expects the estimated residual value at the end of the lease term to be $29,000. The lease contains no purchase option.

a) Prepare an amortization schedule of the lease liability.

b)Prepare the entries for Ash Company for 2020.

c)Let’s now assume that Ash Corporation expects the estimated residual value at the end of the lease term to be $10,150 instead. Prepare the entries for Ash Corporation for 2020.

Answer 1

Computation of Lease Liability

Date	Payment	Discount factor @ 8%	Discounted Cashflows
1/1/2020	34577	1.0000	34,577.00
1/1/2021	34577	0.9259	32,015.74
1/1/2022	34577	0.8573	29,644.20
1/1/2023	34577	0.7938	27,448.34
1/31/2023	Residual value (guaranteed) 29000	0.7350	21,315.87
		TOTAL	145,001.15

1. Amortization schedule of the lease liability:

Date	Payment	Towards interest		Towards lease liability		O/s Lease liability
1/1/2020	34577				34577	110,424.15
1/1/2021	34577	110424.15*8%	8,833.93	34577-8833.93	25,743.07	84,681.08
1/1/2022	34577	84681.08*8%	6,774.49	34577-6774.49	27,802.51	56,878.57
1/1/2023	34577	56878.57*8%	4,550.29	34577-4550.29	30,026.71	26,851.85
1/31/2023	29000	26851.86*8%	2,148.15	29000-2148.15	26,851.85	-

2.

1/1/20	Right of Use asset a/c Dr	145001.15
	To Lease Liability a/c		145001.15
1/1/20	Lease Liability a/c Dr	34577
	To Cash a/c		34577
	(1st payment)
31/12/20	Depreciation (145001.15/4) Dr	36250.29
	To Right of use asset a/c		36250.29
31/12/20	Interest expense a/c Dr	8833.93
	To Interest Payable		8833.93
31/12/20	Profit and Loss a/c Dr	45084.22
	To Depreciation a/c		36250.29
	To Interest expense a/c		8833.93

3. Assuming the residual value of $ 10150 is also guaranteed by Ash, we get total lease liability as follows:

Date	Payment	Discount factor @ 8%	Discounted Cashflows
1/1/2020	34577	1.0000	34,577.00
1/1/2021	34577	0.9259	32,015.74
1/1/2022	34577	0.8573	29,644.20
1/1/2023	34577	0.7938	27,448.34
1/31/2023	New Residual Value 10150	0.7350	7,460.55
		TOTAL	131,145.84

1/1/20	Right of Use asset a/c Dr	131145.84
	To Lease Liability a/c		131145.84
1/1/20	Lease Liability a/c Dr	34577
	To Cash a/c		34577
	(1st payment)
31/12/20	Depreciation (131145.84/4) Dr	32786.46
	To Right of use asset a/c		32786.46
31/12/20	Interest expense a/c (131145.84-34577)*8% Dr	7725.51
	To Interest Payable		7725.51
31/12/20	Profit and Loss a/c Dr	40511.97
	To Depreciation a/c		32786.46
	To Interest expense a/c		7725.51