Question

Summer, Inc., (lessee) entered into an 8-year operating lease on January 1, Year 1. Annual lease payments begin December 31, Year 1. They are $55,000 for Years 1-7 with a final payment in Year 8 of $100,000. The rate implicit in the lease of 8% is known to Summer. The present value of 1 at 8% for 8 years is 0.540. The present value of an ordinary annuity at 8% for 8 years is 5.747. What is the amortization amount of the right-of-use asset in Year 1 for Summer, Inc.

Answer 1

Answer:

The amortization amount of the right-of-use asset in year 1 is $46,260.63

Explanation:

The amortization amount of right-of-use asset in year 1 can be computed by first of all ascertaining the present value of cash outflows of annual lease payments as shown below:

Years              cash flows        DCF        PV

1-7                   $55,000        5.747    $316,085

8                      $100,000     0.540    $54,000

present of value of liability=right-of-use asset=$370,085 ($316085+$54000)

Amortization charge=right-of-use asset/useful life

right-of-use asset is $370085

useful life is 8 years

amortization charge=$370,085/8 =$46,260.63