Question

(Lessee Computations and Entries, Capital Lease with Unguaranteed Residual Value) Assume the same data as in P21-10 with National Airlines having an incremental borrowing rate of 10%.

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

Total reduction of lease liability = $270,361

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 10-year lease amortization schedule

NATIONAL AIRLINES (Lessee) Lease Amortization Schedule (Annuity-due basis and URV)
Beginning of year	Annual Lease payment	Interest (10%) on Lease Liability	Reduction of the lease liability	Lease Liability
	(a)	(b)	(c)	(d)
Initial PV	$ 0	-	-	$ 270,361
1	40,000	-	$ 40,000	230,361
2	40,000	$ 23,036	16,964	213,397
3	40,000	21,340	18,660	194,737
4	40,000	19,474	20,526	174,211
5	40,000	17,421	22,579	151,632
6	40,000	15,163	24,837	126,795
7	40,000	12,680	27,320	99,475
8	40,000	9,948	30,052	69,423
9	40,000	6,942	33,058	36,365
10	40,000	3,635	36,365	0
	$420,000	$129,639	$270,361

Notes:

1. The rounding error is $1.00 in Interest (10%) on the Lease Receivable at 10 Initial PV
2. Annual lease payment is required by the lease contract.
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).