Question

(Lessee Computations and Entries, Capital Lease with Guaranteed Residual Value) Assume the same data as in P21-13 and that Chambers Medical Center has an incremental borrowing rate of 10%.

Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is \(411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be \)15,000. The hospital will pay rents of \(60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of \)250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.

Instructions

b) Prepare a 10-year lease amortization schedule.

Short answer

The recovery of lease receivable = $411,324

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 amortization method. The majority of finance leases are amortized over the lease period with continuous payments and are customized to meet the lessee's specific needs.

Preparing 10-year lease amortization

CHAMBERS MEDICAL (Lessee) Lease Amortization Schedule (Annuity-Due Basis, GRV)
Beginning of Year	Annual Lease Payment Plus Residual Value	Interest (10%) on Lease Receivable	Recovery of Lease Receivable	Lease Receivable
	(a)	(b)	(d)	(e)
Initial PV	-	-	-	$411,324
1	$ 60,000	-	$60,000	351,324
2	60,000	$35,132	24,868	326,456
3	60,000	32,646	27,354	299,102
4	60,000	29,910	30,090	269,012
5	60,000	26,901	33,099	235,913
6	60,000	23,591	36,409	199,504
7	60,000	19,950	40,050	159,454
8	60,000	15,945	44,055	115,399
9	60,000	11,540	48,460	66,939
10	60,000	6,694	53,306	13,633
End of 10	15,000	1,367	13,633	0
	$615,000	$203,676	$411,324

Note:

1. The rounding error is $4.00 in interest (10%) on the lease receivable at end of 10
2. Annual lease payment is required by the lease contract.
3. Preceding balance of (d)10%, except the beginning of the first year of lease term
4. (a) Minus (b).
5. Preceding balance minus (c).