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Problem 15- 2 National Insulation Corporation

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P15-2 Lease amortization schedule LO5 LO8

On January 1, 2011, National Insulation Corporation (NIC) leased office space under a capital
lease. Lease payments are made annually. Title does not transfer to the lessee and there is no
bargain purchase option. Portions of the lessee's lease amortization schedule appear below:

Jan. 1 Payments Effective Interest Decrease in Balance Outstanding Balance
2011 192501
2011 20000 20000 172501
2012 20000 17250 2750 169751
2013 20000 16975 3025 166726
2014 20000 16673 3327 163399
2015 20000 16340 3660 159739
2016 20000 15974 4026 155713

2028 20000 7364 12636 61006
2029 20000 6101 13899 47107
2030 20000 4711 15289 31818
2031 35000 3182 31818 0

Required:

1. What is NIC's lease liability at the inception of the lease (after the first payment)?

2. What amount would NIC record as a leased asset?

3. What is the lease term in years?

4. What is the asset's residual value expected at the end of the lease term?

5. How much of the residual value is guaranteed by the lessee?

6. What is the effective annual interest rate?

7. What is the total amount of minimum lease payments?

8. What is the total effective interest expense recorded over the term of the lease?

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