Question

Elizabeth Leasing Company signs an agreement on January 1, 2025, to lease equipment to Sage Hill Company. The following information relates to this agreement.

1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.
2. The fair value of the asset at Jartary 1,2025 , is $74,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed.
4. The agreement requires equal annual rental payments of $23,484,02 to the lessor, beginning on January 1,2025.
5. The lessee's incremental borrowing rate is 5%. The lessor's implicit rate is 4% and is unknown to the lessee.
6. Sage Hill uses the straight-line depreciation method for all equipment
Prepare an amortization schedule that would be suitable for the lessee for the lease term.

Answer 1

To prepare the amortization schedule, calculate the annual interest expense, annual reduction in liability, and ending lease liability for each year of the lease term.

Step-by-step explanation:

The question requires the preparation of an amortization schedule for the lessee for the lease term of a leasing agreement between Elizabeth Leasing Company and Sage Hill Company. The leasing agreement involves equipment and the lessee uses the straight-line depreciation method. To prepare the amortization schedule, we need to calculate the annual interest expense, annual reduction in liability, and ending lease liability for each year of the lease term. Using the given information, the amortization schedule would show the changes in the lease liability and the corresponding interest expense and reduction in liability over the 3-year lease term.