Question

Shipping R US (LESSEE) leased an ocean-liner freighter from Viking Ships (LESSOR). The lease is non-cancelable, requires beginning of the year (annuity due) payments for three years and at the end of the lease lessee returns the ship to the lessor. Shipping R US's incremental borrowing rate is 6%, but knows that Viking Ships used a 3.5% present value discount rate in determining the present value of the three annual lease payments, which total $6,000,000. Viking Ships manufactured the ocean-liner freighter, the freighter's fair value at the beginning of the lease is $5,500,000 and its estimated useful life is 10 years. Shipping R US is required to pay all executor costs, such as insurance, maintenance and taxes and did not guarantee the residual value of the ocean-liner freighter. Shipping R US uses the straight-line depreciation method for all of its depreciable assets.

Answer 1

Please specify what are the further requirements apart from below:

Lease is non cancelable. Rentals are payable at beginning of the year. So, Present Value at 6% for 3 years beginNing of the year is:

Year	PV Factor
0	1
1	0.943396
2	0.889996
Total	2.833393

Given that Fair Value of lease rentals = 6,000,000 So lease rental => 6,000,000/2.8334 = 217603.

Table showing Computation of Right of use Asset, Finance charge and other relevant splits:

Year	Payment	Principal	Interest	O/s after payment
0	-	-	-	6000000
0	2117603	2117603	-	3882397
1	2117603	1884659	232944	1997738
2	2117603	1997738	119865	0
Total	6352809	6000000	352809	-

Year 0	Right of use asset a/c Dr	6000000
	To Lease Liability a/c		6000000
	(inception if lease)
Year 0	Lease Liability a/c Dr	2117603
	To Cash a/c		2117603
	(First Lease Payment made)
End of Year 1	Interest Expense a/c Dr	232944
	To Interest Payable a/c		232944
	(Due for the year)
End of year 1	Depreciation expense a/c (6000000/3 years) ie SLM Dr	2000000
	To Right of Use asset		2000000
	(Depreciation for the year under SLM)
Beginning of Year 2	Lease liability a/c Dr	1884659
	Interest expense a/c Dr	232944
	To Cash a/c		2117603
	(Second lease payment made)
End of year 2	Interest Expense a/c Dr	119865
	To Interest Payable a/c		119865
	(Due for the year)
End of year 2	Depreciation expense a/c Dr	2000000
	To Right of Use asset		2000000
	(Depreciation for the year under SLM)
Beginning of Year 3	Lease liability a/c Dr	199738
	Interest expense a/c Dr	119865
	To Cash a/c		2117603
	(Second lease payment made)
End of year 3	Depreciation expense a/c Dr	2000000
	To Right of Use asset		2000000
	(Depreciation for the year under SLM)