Question

(Amortization Schedule and Journal Entries for Lessee) Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Plote Company. The following information relates to this agreement.

1. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
2. The fair value of the asset at January 1, 2017, is \(80,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of \)7,000, none of which is guaranteed.
4. Plote Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) \(900 to Rocky Mountain Insurance Company for insurance and (2) \)1,600 to Laclede County for property taxes.
5. The agreement requires equal annual rental payments of $18,142.95 to the lessor, beginning on January 1, 2017.
6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee.
7. Plote Company uses the straight-line depreciation method for all equipment.
8. Plote uses reversing entries when appropriate.

Instructions

(Round all numbers to the nearest cent.)

1. Prepare an amortization schedule that would be suitable for the lessee for the lease term.

Short answer

The total reduction of the lease liability is $75,653.56

Step-by-step solution

Meaning of Lease asset Amortization

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

Preparing an amortization schedule

PLOTE COMPANY (Lessee) Lease Amortization Schedule
Date	Annual Lease Payment	Interest (10%) On Liability	Reduction of the Lease liability	Lease Liability
1/1/17				$75,653.56
1/1/17	$18,142.95	$ 0	$18,142.95	57,510.61
1/1/18	18,142.95	5,751.06	12,391.89	45,118.72
1/1/19	18,142.95	4,511.87	13,631.08	31,487.64
1/1/20	18,142.95	3,148.76	14,994.19	16,493.45
1/1/21	18,142.95	1,649.50	16,493.45	0
	$90,714.75	$15,061.19	$75,653.56

Note: There is a rounding error of 15 cents in interest on liability on 1/1/21

This lease is a capital lease to the lessee because the lease term (five years)

exceeds 75% of the remaining economic life of the asset (five years). Also, the

present value of the minimum lease payments exceeds 90% of the fair value of

the asset.

Working Note:-

Calculation of PV of minimum lease payments

Annual rental payment	$18,142.95
PV of an annuity due of 1 for n = 5,i= 10%	x 4.16986
PV of minimum lease payments	$75,653.56