Question

(Type of Lease; Amortization Schedule) Mike Macinski Leasing Company leases a new machine that has a cost and fair value of $95,000 to Sharrer Corporation on a 3-year noncancelable contract. Sharrer Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2017. Mike Macinski Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31.

Instructions

(b) Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved.

Short answer

Interest revenue/expense on 12/31/2017 is $8,550

Step-by-step solution

Meaning of Lease

The term lease is a lawful bilateral agreement between the lessor and the lessee. The lessor is the owner of the asset while the lessee has only rights to use the assets on lease. The lessee pays the lease rent amount according to the lease agreement.

Preparing an amortization schedule both for the lessor and the lessee

Date	Rent Receipt/ Payment	Interest Revenue/ Expense	Reduction of Principal	Receivable/ Liability
1/1/17	-	-	-	$95,000
12/31/17	$37,530	$8,550	$28,980	66,020
12/31/18	37,530	5,942	31,588	34,432
12/31/19	37,530	3,098	34,432	0

Working Notes:-

Calculation of interest revenue/expense on 12/31/2017

$$\begin{gathered} \mathrm{Interest}\mathrm{revenue}/\mathrm{expense}=\mathrm{cost}\mathrm{and}\mathrm{fair}\mathrm{value}\times \mathrm{return}\mathrm{rate} \\ =\$95,000\times \frac{9}{100} \\ =\$8,550 \end{gathered}$$

Note: There is a rounding difference in interest revenue/expense on 12/31/2019