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A lease agreement that qualifies as a finance lease calls for annual lease payments of $25,000...

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Accounting

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

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

Answer & Explanation Solved by verified expert
3.9 Ratings (550 Votes)

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

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