Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $50,000 over a four-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 7%. (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: 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	7%	Lease Payment	PV Of Lease payment		Date	Payment	Interest	Lease lowered by	Lease Receivable
0	1.0000	50000	50000						181216
1	0.9346	50000	46729		Jan-01	50000	0	50000	131216
2	0.8734	50000	43672		Dec-31	50000	9185	40815	90401
3	0.8163	50000	40815
Net Present Value			181216

c.

Interest Expense	$                        9,185
Depreciation Expense	$                      45,304
Pretax earnings reduced by	$                      54,489
Note: Depreciation Expense (181216/4)