Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $25,000 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, 2016, the beginning of the lease. Lease payments will occur on January 1 each year thereafter. The interest rate is 5%.

a. Determine the present value of the lease upon the lease's inception.
b. Create a partial amortization through the second payment on January 1, 2017.
c. If the lessee’s fiscal year is the calendar year, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31?

Answer 1

Year	Year	PV factor @5%	cash Flow	Discounted Cash Flow
					0	1	1	$25,000	$ 25,000
1	2	0.9523810	25,000	23,810
2	3	0.9070295	25,000	22,676
3	4	0.8638376	25,000	21,596
4	5	0.8227025	25,000	20,568
5	6	0.7835262	25,000	19,588
	Net Present Value			$1,33,237

a) The Present Value of Minimum lease payment is $ 1,33,237

B) Initial Balance	$ 1,33,237
less: 1St Payment	$ 25,000
Net liability	$ 108,237

C)
Interest expense Inthe year end	($1,33,237*5%)	$6,662
Depreciation expense	($1,33,237/6)	$22,206
Pre Tax earnings shall be reduced by		$28,868