A lease agreement calls for quarterly lease payments of $5,376 over a 10-year lease term, with the first payment at July 1, the lease’s inception. The interest rate is 8%. Both the fair value and the cost of the asset to the lessor are $150,000. What would be the amount of interest expense the lessee would record in conjunction with the second quarterly payment at October 1? What would be the amount of interest revenue the lessor would record in conjunction with the second quarterly payment at October 1?
Answer:
The amount of interest expense the lessee would record in conjunction with the second quarterly payment at October 1 is = $2,892:
| Initial balance, July 1 (given) | 1,50,000 |
| Less: Reduction for first payment, January 1 | -5376 |
| Balance | 14464 |
Interest expense October 1
= 2% x $144,624
= $2,892
here Journal entries (not required):
July 1
| Description | Debit $ | Credit $ |
| Leased asset (given) | 1,50,000 | |
| Lease payable | 1,50,000 |
| Description | Debit $ | Credit $ |
| Lease payable | 5376 | |
| Cash (lease payment) | 5376 |
Oct. 1
| Description | Debit $ | Credit $ |
| Interest expense
(2% x [$150,000 – 5,376]) |
2,892 | |
| Lease payable (difference) | 2,484 | |
| Cash (lease payment) | 5,376 |
The amount of interest revenue the lessor would record in conjunction with the second quarterly payment at October 1 also is $2,892, determined in the same manner.
