Question

Summer, Inc., (lessee) entered into an 8-year operating lease on January 1, Year 1. Annual lease payments begin December 31, Year 1. They are $55,000 for Years 1-7 with a final payment in Year 8 of $100,000. The rate implicit in the lease of 8% is known to Summer. The present value of 1 at 8% for 8 years is 0.540. The present value of an ordinary annuity at 8% for 8 years is 5.747. What is the amortization amount of the right-of-use asset in Year 1 for Summer, Inc.

Answer 1

The amortization amount of the right-of-use asset in Year 1 for Summer, Inc. is $25,142.80.

Step-by-step explanation:

The amortization amount of the right-of-use asset in Year 1 for Summer, Inc. can be calculated using the formula:

Amortization Amount = Lease Liability * Discount Rate

Lease Liability can be calculated by finding the present value of the lease payments:

Lease Liability = $55,000 * Present Value of an Ordinary Annuity at 8% for 7 years + $100,000 * Present Value of 1 at 8% for 8 years

Using the given present value factors, the lease liability can be calculated as:

Lease Liability = $55,000 * 5.747 + $100,000 * 0.540 = $314,285

Therefore, the amortization amount of the right-of-use asset in Year 1 would be:

Amortization Amount = $314,285 * 0.08 = $25,142.80