Chapter 16, Problem 21P

The Harris Company is the lessee on a four-year lease with the following payments at the end of each year:

$\begin{array}{|l|}\hline \text{Year 1:}\text{\$10,000}\hfill \\ \text{Year 2:}\text{\$15,000}\hfill \\ \text{Year 3:}\text{\$20,000}\hfill \\ \text{Year 4:}\text{\$25,000}\hfill \\ \hline\end{array}$

An appropriate discount rate is 7 percent, yielding a present value of $\text{\$48,055}\text{.}$

a. If the lease is an operating lease.

i. What will be the initial value of the right-of-use asset?

ii. What will be the initial value of the lease liability?

iii. What will be the lease expense shown on the income statement at the end of year 1?

iv. What will be the interest expense shown on the income statement at the end of year 1?

v. What will be the amortization expense shown on the income statement at the end of year 1?

b. If the lease is a finance lease,

i. What will be the initial value of the right-of-use asset?

ii. What will be the initial value of the lease liability?

iii. What will be the lease expense shown on the income statement at the end of year 1?

iv. What will be the interest expense shown on the income statement at the end of year 1 ?

v. What will be the amortization expense shown on the income statement at the end of year 1?