Merlin Co. leased equipment to Houdini Inc. The equipment cost the lessor $200,000. The appropriate interest rate for this lease is 15%. The annual lease payments are made at the end of each year. The lease term is three years. The residual value at the end of the lease term is expected to be $40,000. Houdini has the option to purchase the equipment at that time for $20,000. Assume this is a direct financing lease. Required:
1. For this lease:
(a.) The lease payment computed by the lessor is $ _____________.
(b.) The amount the lessee should capitalize is $ ____________.
2. How much interest should be recognized at the end of year 1 by the:
(a.) Lessor? $ __________
(b.) Lessee? $ _____

Question

Merlin Co. leased equipment to Houdini Inc. The equipment cost the lessor $200,000. The appropriate interest rate for this lease is 15%. The annual lease payments are made at the end of each year. The lease term is three years. The residual value at the end of the lease term is expected to be $40,000. Houdini has the option to purchase the equipment at that time for $20,000. Assume this is a direct financing lease.  Required:
1. For this lease:
(a.) The lease payment computed by the lessor is $ _____________.
(b.) The amount the lessee should capitalize is $ ____________.
2. How much interest should be recognized at the end of year 1 by the:
(a.) Lessor? $ __________
(b.) Lessee? $ _____

Quizplus · Accepted Answer

The Answer of Merlin Co. leased equipment to Houdini Inc. The equipment cost the lessor $200,000. The appropriate interest rate for this lease is 15%. The annual lease payments are made at the end of each year. The lease term is three years. The residual value at the end of the lease term is expected to be $40,000. Houdini has the option to purchase the equipment at that time for $20,000. Assume this is a direct financing lease.  Required:
1. For this lease:
(a.) The lease payment computed by the lessor is $ _____________.
(b.) The amount the lessee should capitalize is $ ____________.
2. How much interest should be recognized at the end of year 1 by the:
(a.) Lessor? $ __________
(b.) Lessee? $ _____

Merlin Co Leased Equipment to Houdini Inc