Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $26,269 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. The interest rate is 5%. The lessor’s fiscal year is the calendar year. The lessor manufactured this asset at a cost of $125,000. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required:

a. Determine the price at which the lessor is “selling” the asset (present value of the lease payments).

PV factors based on Table or Calculator function: Lease Payment n = i = PV of Lease

b. Create a partial amortization schedule through the second payment on January 1, 2017

Date Cash Interest Received Effective Interest Decrease in Balance Outstanding Balance

01/01/2016

01/01/2016

01/01/2017

. c. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31, 2017 (ignore taxes)?

Pretax impact on income related to the lease: Total pretax impact on income

Answer 1

Answer A
Determination of present value of the lease upon lease inception
Year	Lease Payment	Discount Factor @ 5%	Present Values			PV Factors based on
0	$26,269	1.00000	$26,269			Table or calculator function
1	$26,269	0.95238	$25,018			Lease Payment	$26,269
2	$26,269	0.90703	$23,827			n=	6
3	$26,269	0.86384	$22,692			i=	5%
4	$26,269	0.82270	$21,612			PV of Lease	$140,000
5	$26,269	0.78353	$20,582
NPV			$140,000
Present Value of Lease =			$140,000
Answer B
Partial Amortization through the payment on January 1,2017
Date	Lease Payment	Effective Interest	Decrease in balance	Outstanding balance
01-01-16				$140,000
01-01-16	$26,269	$0	$26,269	$113,731
01-01-17	$26,269	5687 [$113731*5%]	$20,582	$93,149
Answer C
Impact on pretax income related to the lease:
Income Statement debit side
Interest Expense		$5,687
Total Expenses		$5,687