Question

(Lessor Computations and Entries, Sales-Type Lease with Unguaranteed Residual Value) George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is \(278,072, and its unguaranteed residual value at the end of the lease term is estimated to be \)20,000. National will pay annual payments of \(40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of \)180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Instructions

(b) Prepare a 10-year lease amortization schedule.

Short answer

The total lease recovery is $278,072.

Step-by-step solution

Meaning of Lease Asset Amortization

The amortization of a leased asset is determined by the asset's historical cost, expected economic life, residual value, and the amortization method. Most finance leases are amortized with continuous payments over the term of the lease and are customized to meet the specific needs of the lessee.

Preparing 10-year lease amortization schedule

GEORGE COMPANY (Lessor) Lease Amortization Schedule Annuity Due Basis, Unguaranteed Residual Value
Beginning of year	Annual Lease payment Plus Residual Value	Interest (10%) on Lease Receivable	Lease Receivable Recovery	Lease Receivable
	(a)	(b)	(c)	(d)
Initial PV	$ 0	$ 0	$ 0	$278,072
1	40,000	0	40,000	238,072
2	40,000	23,807	16,193	221,879
3	40,000	22188	17,812	204,067
4	40,000	20,407	19,593	184,474
5	40,000	18,447	21,553	162,921
6	40,000	16,292	23,708	139,213
7	40,000	13,921	26,079	113,134
8	40,000	11,313	28,687	84,447
9	40,000	8,445	31,555	52,892
10	40,000	5,289	34,711	18,181
End of 10	20,000	1,819	18,181	0
	$420,000	$141,928	$278,072

Notes:

1) The rounding error is $1.00 in Interest (10%) on the Lease Receivable at the end of 10 Initial PV

2) The lease contract requires an annual lease payment.

3) Preceding balance of (d) X 10%, except the beginning of the first year of the lease term.

4) (a) Minus (b).

5) Preceding balance minus (c).