Question

Laura Leasing Company signs an agreement on January 1,2025 , to lease equipment to Plote Company. Ihe following intormation 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 January 1,2025 , is $80,000.
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 $25,562.96 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. Plote uses the straight-line depreciation method for all equipment. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round answers to 2 decimal places, e.g. 5,275.15.)

Answer 1

To prepare an amortization schedule for the lessee, calculate the present value of the lease payments, determine the annual depreciation expense, and subtract the depreciation expense from the rental payment to determine the interest expense and reduction in the lease liability.

Step-by-step explanation:

The first step in preparing an amortization schedule for the lessee is to calculate the present value (PV) of the lease payments. The PV can be calculated using the formula PV = PMT x [1 - (1 + r)^-n] / r, where PMT is the annual rental payment, r is the lessee's incremental borrowing rate, and n is the lease term in years. Using the given information, the PV of the lease payments is $65,086.36.

The next step is to calculate the annual depreciation expense. Since the lessee uses the straight-line depreciation method, the depreciation expense is the difference between the fair value of the asset and its residual value divided by the estimated economic life. In this case, the annual depreciation expense is ($80,000 - $7,000) / 5 = $14,600.

Finally, the amortization schedule can be prepared by subtracting the annual depreciation expense from the annual rental payment to determine the interest expense, and then subtracting the interest expense from the rental payment to determine the reduction in the lease liability. The remaining lease liability at the end of each year is then used to calculate the interest expense and reduction in the lease liability for the next year.