On January 1, 2016, National Insulation Corporation (NIC) leased office space un
ID: 2426486 • Letter: O
Question
On January 1, 2016, National Insulation Corporation (NIC) leased office space under a capital lease. Lease payments are made annually. Title does not transfer to the lessee and there is no bargain purchase option. Portions of the lessee's lease amortization schedule appear below: Jan. 1 Payments Effective Interest Decrease in Balance Outstanding Balance
1. What is NIC’s lease liability at the inception of the lease (after the first payment)?
What amount would NIC record as a leased asset?
What is the lease term in years?
How much of the residual value is guaranteed by the lessee?
What is the effective annual interest rate? (Round your answer to 1 decimal place.)
Jan. 1 Payments Effective Interest Decrease in Balance Outstanding Balance 2016 235,000 2016 22,000 22,000 213,000 2017 22,000 18,105 3,895 209,105 2018 22,000 17,774 4,226 204,879 2019 22,000 17,415 4,585 200,294 2020 22,000 17,025 4,975 195,319 2021 22,000 16,602 5,398 189,921 — — — — — — — — — — — — — — — 2033 22,000 7,632 14,368 75,423 2034 22,000 6,411 15,589 59,834 2035 22,000 5,086 16,914 42,920 2036 46,568 3,648 42,920 0Explanation / Answer
1 Lease Liability at the Inception of Lease = $235,000 2 NIC should Record lease Liability of $235000 3 Lease term in years = 20 years i.e 2035-2016 4 Assets expected residual value at the end of lease term = $42920 5 Assets residual value Guaranteed by the lessee = $42920 6 Effective annual interest rate = 3648/42920*100 =8.49% 7 Minimum Lease payment =22000*20= 440000 8 Total effective interest expense recorded over the term of the lease = (22000*20)-235000-42920= $162080