Problem 15-3 Lease amortization schedule [LO15-2] On January 1, 2018, Majestic M
ID: 2558542 • Letter: P
Question
Problem 15-3 Lease amortization schedule [LO15-2] On January 1, 2018, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Majestic. Portions of the Equipment Leasing's lease amortization schedule appear below: Jan. 1 Payments Interest Effective Decrease in Outstanding Balance Balance 2018 2018 2019 2020 2021 2022 2023 26,000 26,000 26,000 26,000 26,000 26,000 26,000 21,749 21,324 20,856 20, 342 19,776 19,154 26,000 4,251 4,676 5,144 5,658 6,224 6,846 243,489 217,489 213,238 208,562 203,418 197,760 191,536 184,689 2035 2036 2037 26,000 26,000 26,000 6,466 4,513 2,364 19,534 21,487 23,642 45,129 23,642 Required 1. What is Majestic's lease liability at the beginning of the lease (after the first payment)? 2. What amount would Majestic record as a right-of-use asset? 3. What is the lease term in years? 4. What is the effective annual interest rate? (Round your percentage answers to 1 decimal place.) 5. What is the total amount of lease payments? 6. What is the total effective interest expense recorded over the term of the lease? 1. Lease liability 2. Right-of-use asset 3. Lease termm 4. Effective annual interest rate 5.Total of lease payments 6. Total effective interest expense earsExplanation / Answer
Solution:
1. Majestic lease liability at the beginning of lease = $243,489 - $26,000 = $217,489
2. The amount that majestic record as a right of use assets = Present value of lease payment = $243,489
3. Lease term in years = 01.01.2018 to 31.12.2037 = 20 years
4. Effective annual interest rate = $21,749 / $217,489 = 10%
5. Total amount of lease payments = $26000*20 = $520,000
6. Total effective interest expense = Total lease payment - amount recorded as right to use assets
= $520,000 - $243,489 = $276,511