Q:
You are currently reviewing the following information for JKL Corp:
Starting date of lease:
January 1st, 2002
Annual year-end lease payments:
$32,000
Term of Lease:
5 years
Buy-back value at end of term:
$55,000
Interest rate implicit on the lease:

11%

Interest rate on company's general debt:
13%

If the company uses the capitalized lease method of accounting, what would be the interest expense during the second year of the inception of the lease?
A) $14,906
B) $16,600
C) $15,750
D) $14,490
A:

The correct answer is: A)

Year
Lease Payments
Interest Expense
BV of Lease
0
$150,909
1
$32,000
$16,600
135,509
2
32,000
14,906
118,415
3
32,000
13,025
99,440
4
32,000
10,938
78,378
5
32,000

8,622

55,000

Interest Expense = (Book Value of Capitalized Lease at beginning of period) x (Effective Interest Rate)
Step 1: Beginning Book Value of Capitalized Lease = present value of lease + present value of the buy-back value.
TI BAII:
Present value of buy-back value
FV = -55,000
I = 11%
N = 5
CPT PV = 32,640
Present value of lease
PMT = -32000
I = 11%
N = 5
CPT PV = 118,269
Book value = 32,640 + 118,269 = $150,909
Step 2: Interest Expense = Previous BV of lease x interest rate

We'll show just the first figure for this step:
= 150909 x 11% = $16,600
Step 3: Book value = Previous BV of lease - lease payment + interest expense
Again, we'll run an example of the first figure for this step:
Book Value (year 1) = 150909 - 32000 + 16600 = $135,509
Therefore, the interest expense during the second year of the lease would be $14,906 (135509 x 11%).


MORE FAQS

  1. At the beginning of the year, HIJ Corp. began to lease new equipment ...

  2. At the beginning of the year, OPQ Corp. began to lease a building using the capitalized method ...

  3. Why might a bond agreement limit the amount of assets that the firm can lease?

  4. How have low interest rates affected lease rates in the automotive sector?

  5. At the beginning of the year, ABC Corp. began to lease a major piece of equipment ...

  6. How does the value of the real estate impact the value of a triple net (NNN) lease?

  7. What are the differences between single, double and triple-net leases?

  8. What kinds of real estate transactions use triple net (NNN) leases?

  9. What is the importance of residual value in an automobile lease?

  10. I have a small business, and I'm considering setting up an SEP IRA. What are leased employees? Does this term refer to outside contractors who receive 1099-Rs? If so, how would the 5305-SEP need to be worded to make it acceptable to the IRS?

  11. What are typical forms of long-term debt for a public company?

  12. If a telecommunication company wants to build a tower on my land how much should I charge?

  13. How can I fund A Roth IRA if my income is too high to make direct contributions?

  14. Are my Social Security benefits reduced if I receive extra pensions from different sources?

  15. What's the average salary of a market research analyst?

  16. What is the Difference Between Operating Income and Net Income?

  17. How does my spousal Social Security benefit work?

  18. Why would you keep funds in a money market account and not a savings account?

  19. Is technical analysis a self-fulfilling prophecy?

  20. Are student loans amortized?

RELATED FAQS

  1. At the beginning of the year, HIJ Corp. began to lease new equipment ...

    The correct answer is: b) Total Lease Payment = Interest expense + Principal repayment Step 1: Interest expense = 8.5% of ...
  2. At the beginning of the year, OPQ Corp. began to lease a building using the capitalized ...

    The correct answer is: c) Step 1: Calculate the Present Value of the lease: PMT = $12,000; N = 7; I = 7.5%*
  3. Why might a bond agreement limit the amount of assets that the firm can lease?

    Bond covenants can limit the amount of leases a company can have because leasing contracts are a form of debt. Taking on ...
  4. How have low interest rates affected lease rates in the automotive sector?

    Find out how and why lower interest rates for leasing new automobiles have helped spur more consumers to lease cars instead ...
  5. At the beginning of the year, ABC Corp. began to lease a major piece of equipment ...

    The correct answer is: A) Under the capitalized lease method, the lessee must treat the asset as if it was purchased with ...
  6. How does the value of the real estate impact the value of a triple net (NNN) lease?

    Understand how the value of the real estate involved in a triple-net lease impacts the value of the lease both positively ...
RELATED TERMS
  1. Capital Lease

    A lease considered to have the economic characteristics of asset ...
  2. Capitalized Lease Method

    An accounting approach that identifies a company's lease obligation ...
  3. Closed-End Lease

    A rental agreement that puts no obligation on the lessee (the ...
  4. Leasehold

    An accounting term used to classify an asset on a company's balance ...
  5. Lease Utilization

    A financial ratio that measures how much a company uses leasing ...
  6. Minimum Lease Payments

    The lowest amount that a lessee can expect to make on a lease ...
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center