On December 31, 2011, Thomas Henley, financial vice president of Kingston Corporation,
signed a noncancelable three-year lease for an item of manufacturing equipment. The lease
called for annual payments of $41,635 per year due at the end of each of the next three years.
The leased equipment's expected economic life was four years. No cash changed hands because
the first payment wasn't due until December 31, 2012.
Henley was talking with his auditor that afternoon and was surprised to learn that the lease
qualified as a capital lease and would have to be put on the balance sheet. Although his intu-
ition told him that capitalization adversely affected certain ratios, the size of these adverse
effects was unclear to him. Because similar leases on other equipment were up for renewal in
2012, he wanted a precise measure of the ratio deterioration. "If these effects are excessive," he
said, "I'll try to get similar leases on the other machinery to qualify as operating leases when
they come up for renewal next year."
Assume that the appropriate rate for discounting the minimum lease payments is 12%. Also
assume that the asset Leased equipment under capital leases will be depreciated on a straight-
line basis.
Required:
1. Prepare an amortization schedule for the lease.
in worried Henley. Before factoring in
