Answer in Accounting for Milan #230864

On January 1, Year 1 Trinity Inc. leased equipment. The lease requires Trinity to make five annual payments of $13,000 beginning December 31, Year 1. Insurance was paid up front for the year at a cost of $800. There is a guaranteed residual value of $6000 and the asset is expected to be worth only $1000 at the end of the lease term, December 31, Year 5. The lease qualifies as a finance lease. The interest rate used is 9%. Present value factors for the 9% rate are as follows:

  • For an annuity due with 5 payments 4.240
  • For an ordinary annuity with 5 payments 3.890
  • Present value of $1 for 5 periods 0.650 Assuming a seven-year life and a five-year lease term. How much is the amortization expense of the “right of use” asset on December 31, Year 1?
  • 10,764
  • 53,820 / 5 = 10,764
  • Debit Amortization Expense $10,764
  • Credit Right of Use Asset $10,764

For this question, how come we don’t subtract 5000 from the $53,820 and then divide by 5.

There was no initial principal amount that was placed and therefore all the monies were subjected to the amortization. Insurance was paid up front for the year at a cost of $800 and thus not Trinity thus demanding that the total sum $53820 be divided by 5 to know the yearly payments.

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