Answer to Question #230864 in Accounting for Milan

Question

On January 1, Year 1 Trinity Inc. leased equipment. The lease requires Trinity to make five annual payments of $13,000 beginning December 31, Year 1. Insurance was paid up front for the year at a cost of $800. There is a guaranteed residual value of $6000 and the asset is expected to be worth only $1000 at the end of the lease term, December 31, Year 5. The lease qualifies as a finance lease. The interest rate used is 9%. Present value factors for the 9% rate are as follows:

• For an annuity due with 5 payments 4.240
• For an ordinary annuity with 5 payments 3.890
• Present value of $1 for 5 periods 0.650 Assuming a seven-year life and a five-year lease term. How much is the amortization expense of the “right of use” asset on December 31, Year 1?
• 10,764
• 53,820 / 5 = 10,764
• Debit Amortization Expense $10,764
• Credit Right of Use Asset $10,764

For this question, how come we don't subtract 5000 from the $53,820 and then divide by 5.

Answer 1

There was no initial principal amount that was placed and therefore all the monies were subjected to the amortization. Insurance was paid up front for the year at a cost of $800 and thus not Trinity thus demanding that the total sum $53820 be divided by 5 to know the yearly payments.