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Homework answers / question archive / On January 1, 2017, X company signed a contract to lease Y company an equipment with annual payment of $8,000 for 5 years will be paid at the beginning of each year, usefullife is 6 years when the discount rate is 10%, compute interest expense should be recorded on Dec

On January 1, 2017, X company signed a contract to lease Y company an equipment with annual payment of $8,000 for 5 years will be paid at the beginning of each year, usefullife is 6 years when the discount rate is 10%, compute interest expense should be recorded on Dec

Accounting

On January 1, 2017, X company signed a contract to lease Y company an equipment with annual payment of $8,000 for 5 years will be paid at the beginning of each year, usefullife is 6 years when the discount rate is 10%, compute interest expense should be recorded on Dec.31,2017 assuming no salvage value?

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On January 1, 2017, X company signed a contract to lease Y company an equipment with annual payment of $8,000 for 5 years will be paid at the end of each year, usefullife is 6 years and unguaranteed salavage value of $2,000, when the discount rate is 10%, compute the leased receivable should be recorded by lessor on January 1,2017?

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As per given details please refer below answer :-

Answer For 1

As 1st year payment done up front at the beginning of the year hence in 1st payment there is only reduction in lease liability balance. So there is no such payment for interest when 1st lease payment done. But there is accrued interest expenses which will be paid at the time of start of 2nd year which is $ 2,535.89. This interest expnese need to book at the end of 1st year as accrued interest.

To get answer please refer below lease liability amortization schedule for your reference.

Year Lease Payment Interest Expenses Principle Reduction Remaining Liability
        $                 33,358.92
1 $                8,000.00 $                                 -   $                 8,000.00 $                 25,358.92
2 $                8,000.00 $                    2,535.89 $                 5,464.11 $                 19,894.82
3 $                8,000.00 $                    1,989.48 $                 6,010.52 $                 13,884.30
4 $                8,000.00 $                    1,388.43 $                 6,611.57 $                   7,272.73
5 $                8,000.00 $                        727.27 $                 7,272.73 $                                -  

Answer for 2 :-

To book leased receivable we need to calculate the present value for future payments and salvage value. Please refer below calculation of present value.

Year Interest Rate Annual Payment Present Value
1 10% $                    8,000.00 $7,272.73
2 10% $                    8,000.00 $6,611.57
3 10% $                    8,000.00 $6,010.52
4 10% $                    8,000.00 $5,464.11
5 10% $                    8,000.00 $4,967.37
Total Present Value     $30,326.29

Present Value of Unguaranteed Salvage value at the end of lease Term at the 10% discount rate is $1,241.84.

So Total Lease receivable value is $ 30,326.29 + $ 1,241.84 = $ 31,568.14.

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