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, OPQ Corp. began to lease a building using the capitalized method ...

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

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

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

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

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

  7. 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?

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

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

  10. What are the three "nets" of an NNN lease?

  11. What debt/equity ratio is common for companies in the telecommunications sector?

  12. Why is it important for an investor to understand business accounting?

  13. What is the difference between book value and market value

  14. What is the difference between a company's book value per share and its intrinsic value per share?

  15. How many attempts at each CFA exam is a candidate permitted?

  16. Do financial advisors need to pass the Series 7 exam?

  17. Do financial advisors need to be approved by FINRA?

  18. How does a broker decide which customers are eligible to open a margin account?

  19. Why is the Nasdaq more heavily weighted to tech stocks than other stock exchanges?

RELATED FAQS

  1. 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%*
  2. 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 ...
  3. 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 ...
  4. 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 ...
  5. What are the differences between single, double and triple-net leases?

    Learn the ins and outs of net lease agreements, including the key differences between single net, double net and triple net ...
RELATED TERMS
  1. Capitalized Lease Method

    An accounting approach that identifies a company's lease obligation ...
  2. Operating Lease

    A contract that allows for the use of an asset, but does not ...
  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. Minimum Lease Payments

    The lowest amount that a lessee can expect to make on a lease ...
  6. Bargain Renewal Option

    A clause in a lease agreement that gives the lessee the option ...
Trading Center