question archive On October 1, Year 2, Knightco signed a lease with JackDeerCorp
On October 1, Year 2, Knightco signed a lease with JackDeerCorp
Subject:FinancePrice:2.86 Bought11
On October 1, Year 2, Knightco signed a lease with JackDeerCorp. for a piece of equipment that Knightco needs for a new production process. The lease is for four (4) years with the first payment due at the time the lease is signed and the remaining payments due on September 30th each year thereafter. At the end of the lease, the equipment will be returned to JackDeer.In order to secure a slightly smaller lease payment, Knight co has guaranteed the estimated residual value of $49,000 at the end of the lease period.
The equipment has a fair market value of $815,000 and costsJackDeer $375,000 to produce. The estimated useful life of the asset is 6 years with no salvage value.
JackDeer used a 4% implicit rate to determine the lease payments. Knightco doesn’t know JackDeer’s implicit interest rate.Knightco’s incremental borrowing rate is 9%.
Complete the following tables:
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LEASE AMORTIZATION SCHEDULE - JackDeer |
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Residual Value |
$49,000 |
PV of RV: |
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Market Value |
$815,000 |
PV OF MLP: |
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INTEREST RATE: |
4.0% |
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TERM in YRS |
PAYMENT: |
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Reduction in |
Lease |
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Lease |
Interest |
Lease |
Liability |
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Date |
Payment |
Expense |
Liability |
BALANCE |
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Oct. 1, Year 2 |
$815,000 |
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Oct. 1, Year 2 |
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Sept. 30, Year 3 |
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Sept. 30, Year 4 |
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Sept. 30, Year 5 |
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Sept. 30, Year 6 |
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LEASE AMORTIZATION SCHEDULE - Knightco |
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BPO or Guar. RV |
$49,000 |
PV of RV: |
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Market Value |
PV OF MLP: |
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INTEREST RATE: |
9.0% |
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TERM in YRS |
PAYMENT: |
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Reduction in |
Lease |
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|
Lease |
Interest |
Lease |
Liability |
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Date |
Payment |
Expense |
Liability |
BALANCE |
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Oct. 1, Year 2 |
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Oct. 1, Year 2 |
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Sept. 30, Year 3 |
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Sept. 30, Year 4 |
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Sept. 30, Year 5 |
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Sept. 30, Year 6 |
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Jack Deer:
Present Value Factor @ 4% at Year 4 = 0.8548
Present Value of Redemption Value = 0.8548 * $49,000 = 41,885.405
Present Value of Monthly Lease Payments = $815,000 - 41,885.405 = 773,114.60
Present Value annuity factor @ 4% for 4 years starting at 0th Year = 4.6299
Monthly Lease Payment = 773,114.60 
4.6299 = $166,983.00
Amortization Schedule:
| Date | Lease Payment | Interest Income | Lease Liability | Liability Balance |
| Oct 1, Y2 | $166,983.00 | 0 | $815,000.00 | $648,017.00 |
| Sep 30, Y3 | $166,983.00 | $25,920.68 | $673,937.68 | $506,954.68 |
| Sep 30 Y4 | $166,983.00 | $20,278.19 | $527,232.87 | $360,249.87 |
| Sep 30 Y5 | $166,983.00 | $14,410.00 | $374,659.86 | $207,676.86 |
| Sep 30 Y6 | $166,983 + $49000 (*RV)= $215,983 |
$8,307.07 | $215,983.00 | $0 |
*RV = Redemption Value
Knight Co.
Present Value factor @ 9% on year 4 = 0.7084
Present Value of Redemption value = $49,000 * 0.7084 = 34,712.84
Present Value annuity factor @ 9% for 4 years starting at 0th Year = `4.2397
Present Value of Monthly Lease Payments = (($166,983 * 4.2397) + 34,712.84) = 742,673.98
Lease liability will be booked at 742,673.98 as actual interest rate is less than the borrowing rate of knight hood
Monthly Lease Payment = $166,983.00
| Date | Lease Payment | Interest Expense | Lease Liability | Liability Balance |
| Oct 1, Y2 | $166,983.00 | 0 | $742,673.98 | $575,690.98 |
| Sep 30, Y3 | $166,983.00 | $51,812.19 | $627,503.17 | $460,520.17 |
| Sep 30 Y4 | $166,983.00 | $41,446.82 | $501,966.98 | $334,983.98 |
| Sep 30 Y5 | $166,983.00 | $30,148.56 | $365,132.54 | $198,149.54 |
| Sep 30 Y6 | $166,983 + $49000 (*RV)= $215,983 |
$17,833.46 | $215,983.00 | $0 |
