Question

Question: (Lessee Entries with Bargain-Purchase Option) The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.

Inception date	May 1, 2017
Annual lease payment due at the beginning of each year, beginning with May 1, 2017	\(21,227.65
Bargain-purchase option price at end of lease term	\) 4,000.00
Lease term	5 years
Economic life of leased equipment	10 years
Lessor’s cost	\(65,000.00
Fair value of asset at May 1, 2017	\)91,000.00
Lessor’s implicit rate	10%
Lessee’s incremental borrowing rate	10%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

Instructions

(Round all numbers to the nearest cent.)

(c) Prepare a lease amortization schedule for Rode Company for the 5-year lease term.

Short answer

Answer

The lease liability is $91,000.

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 a lease amortization for Rode Company for the 5-year lease term.

Computation of lease liability

Annual rental payment	$21,227.65
PV of annuity due of 1 for n = 5,i= 10%	4.16986
PV of periodic rental payments	$88,516.32

Bargain purchase option	$ 4,000.00
PV of 1 for n = 5,i= 10%	.62092
PV of bargain-purchase option	$ 2,483.68

PV of periodic rental payments	$88,516.32
PV of bargain-purchase option	+ 2,483.68
Lease liability	$91,000.00

RODE COMPANY (Lessee) Lease Amortization Schedule
Date	Annual Lease Payment Plus BPO	Interest (10%) in Liability	Reduction of Lease Liability	Lease Liability
5/1/17				$91,000.00
5/1/17	$ 21,227.65		$21,227.65	69,772.35
5/1/18	21,227.65	$6,977.24	14,250.41	55,521.94
5/1/19	21,227.65	5,552.19	15,675.46	29,846.48
5/1/20	21,227.65	3984.65	17,243.00	22,603.48
5/1/21	21,227.65	2,260.35	18,967.30	3,636.18
4/30/22	4,000.00	363.82	3,636.18	0
	$110,138.25	$19,138.25	$91,000.00

Note: Rounding error is 20 cents