On January 1, 2021, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Majestic. Portions of the Equipment Leasing’s lease amortization schedule appear below: Jan. 1 Payments Effective Interest Decrease in Balance Outstanding Balance 308,032 2021 30,000 30,000 278,032 2022 30,000 23,633 6,367 271,665 2023 30,000 23,092 6,908 264,757 2024 30,000 22,504 7,496 257,261 2025 30,000 21,867 8,133 249,128 2026 30,000 21,176 8,824 240,303 2027 30,000 20,426 9,574 230,729 — — — — — — — — — — — — — — — 2038 30,000 6,513 23,487 53,135 2039 30,000 4,516 25,484 27,651 2040 30,000 2,350 27,650 0 Required: 1. What is Majestic’s lease liability after the first lease payment?2. What amount would Majestic record as a right-of-use asset? 3. What is the lease term in years? 4. What is the effective annual interest rate? (Round your percentage answers to 1 decimal place.) 5. What is the total amount of lease payments? 6. What is the total effective interest expense recorded over the term of the lease?

1. Majestic’s lease liability after the first lease payment is $278,032.

2. The amount that Majestic would record as a right-of-use asset is $308,032.

3. The lease term in years is 20 years.

4. The effective annual interest rate is 8.5%.

5. The total amount of lease payments is $600,000.

6. The total effective interest expense recorded over the term of the lease is $29,1968.

Lease Amortization Schedule

Jan. 1         Payments    Effective Interest    Decrease    Outstanding

                                                                     in Balance     Balance

                                                                                            308,032

2021            30,000                                        30,000        278,032

2022           30,000               23,633                6,367         271,665

2023           30,000               23,092               6,908        264,757

2024           30,000               22,504               7,496         257,261

2025           30,000                21,867                8,133         249,128

2026           30,000                 21,176               8,824        240,303

2027           30,000               20,426               9,574        230,729

— — — — — — — — — — — — — — —

2038          30,000                23,487                6,513           53,135

2039          30,000                25,484                4,516          27,651

2040         30,000                 27,650               2,350                   0

Lease term = 20 years (2040 - 2020).

Effective annual interest rate = 8.5% ($23,633/$278,032 x 100).

Total amount of lease payments = $600,000 ($30,000 x 20).

Total effective interest expense recorded over the term of the lease  = $29,1968 ($600,000 - $308,032).

Thus, the total effective interest expense recorded over the term of the lease is $29,1968.

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