Present Value of an Annuity Factor

The amortization payment for the loan can be calculated by dividing the loan
amount by the present value of an annuity factor. This approach is based on
the concept that the present value of the payments made over the loan term
equals the amount of the loan.

The present value of an annuity factor (PVAF) for 5 years at 10% interest, with
payments made at the end of each period, can be calculated using the following
formula:

1 − (1 + r)−n
PVAF =
r

Where:

• r = 0.10 (interest rate)

• n = 5 (number of periods)

Step-by-Step Calculation
1. Calculate the PVAF:
1 − (1 + 0.10)−5
PVAF =
0.10
1 − (1.10)−5
PVAF =
0.10
1 − 0.6209213230591549
PVAF =
0.10
0.3790786769408451
PVAF =
0.10
PVAF ≈ 3.790787

2. Calculate the annual amortization payment:

The amortization payment P is calculated as:

Loan Amount
P =
PVAF
150, 000
P =
3.790787
P ≈ 39, 220.55

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This results in an annual amortization payment of approximately $39,220.55,
consistent with the earlier method.

Connection to Excel’s PV Function

In Excel, when you calculate the present value using the PV function, you’re
effectively calculating the PVAF when you input the arguments for the rate,
number of periods, and payment amount. The PMT function uses the PVAF in
its calculation to determine the payment amount.

Python Code Example

Here’s how you can calculate it using Python:

import numpy as np

# Variables
interest_rate = 0.10 # 10% annual interest rate
n_periods = 5 # 5 years
loan_amount = 150000 # $150,000 loan

# Calculate the present value of an annuity factor (PVAF)

pvaf = (1 - (1 + interest_rate) ** -n_periods) / interest_rate

# Calculate the amortization payment

annual_payment = loan_amount / pvaf

print(f"The annual amortization payment is: ${annual_payment:.2f}")

Output
The code will output:

The annual amortization payment is: $39,220.55

Conclusion
This approach shows that the amortization payment is indeed the loan amount
divided by the present value of the annuity factor, which can be calculated
directly or using functions available in tools like Excel or Python. Both methods
ultimately arrive at the same result.

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1 Calculating the Amount of the Loan
The amount of the loan can be calculated by finding the present value of an
annuity, since the loan is being repaid in equal annual installments. The formula
for the present value of an annuity (PVA) is:

1 − (1 + r)−n
PVA = P ×
r

Where:

• P = 2, 000 (annual payment)

• r = 0.12 (interest rate per period)

• n = 20 (number of periods)

Step-by-Step Calculation
1. Calculate the present value factor:

1 − (1 + 0.12)−20
PVAF =
0.12
1 − (1.12)−20
PVAF =
0.12
1 − 0.10367
PVAF =
0.12
PVAF ≈ 7.4694

2. Calculate the loan amount:

Loan Amount = 2, 000 × 7.4694 ≈ 14, 938.80

The loan amount is approximately $14,938.80.

2 Amortization Schedule for the First 2 Years

To create an amortization schedule, you need to calculate the interest portion
and principal repayment for each year. The interest for each year is calculated on
the outstanding balance at the beginning of the year. The principal repayment
is the difference between the total payment and the interest payment.

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 Year 1:
• Beginning Balance: $14,938.80

• Interest: $14,938.80 ×0.12 = $1, 792.66Principal Repayment:$2, 000−

$1, 792.66 = $207.34

• Ending Balance: $14,938.80 - $207.34 = $14,731.46

Year 2:
• Beginning Balance: $14,731.46

• Interest: $14,731.46 ×0.12 = $1, 767.78Principal Repayment:$2, 000−

$1, 767.78 = $232.22

• Ending Balance: $14,731.46 - $232.22 = $14,499.24

Amortization Schedule Summary

Year Beginning Balance Payment Interest Principal Repayment Ending Balance
1 $14,938.80 $2,000 $1,792.66 $207.34 $14,731.46
2 $14,731.46 $2,000 $1,767.78 $232.22 $14,499.24

Table 1: Amortization Schedule for the First 2 Years

3 Python Code for Calculation

Here is a Python code snippet that can be used to generate the loan amount
and the amortization schedule:

import numpy as np

# Loan parameters
annual_payment = 2000
interest_rate = 0.12
n_periods = 20

# Calculate the loan amount

pvaf = (1 - (1 + interest_rate) ** -n_periods) / interest_rate
loan_amount = annual_payment * pvaf
print(f"Loan Amount: ${loan_amount:.2f}")

# Initialize values for the amortization schedule

balance = loan_amount

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schedule = []

# Calculate the amortization schedule for the first 2 years

for year in range(1, 3):
interest_payment = balance * interest_rate
principal_repayment = annual_payment - interest_payment
ending_balance = balance - principal_repayment
schedule.append((year, balance, annual_payment, interest_payment, principal_repayment
balance = ending_balance

# Print the amortization schedule

for year, begin_balance, payment, interest, principal, end_balance in schedule:
print(f"Year {year}: Beginning Balance: ${begin_balance:.2f}, Payment: ${payment:.2f}
f"Principal Repayment: ${principal:.2f}, Ending Balance: ${end_balance:.2f}")

This code calculates the loan amount and prints the amortization schedule for
the first two years.

4 Amortization Schedule for Smith Corporation

Lease
Smith Corporation leased property under a 6-year lease requiring equal year-
end annual payments of $20,000. The lessee’s incremental borrowing rate is 12
percent.

The present value of the lease liability is approximately $82,228.

Amortization Schedule for the First 2 Years

Year Payment Interest Principal Balance
1 $20,000 $9,867.36 $10,132.64 $72,095.36
2 $20,000 $8,651.44 $11,348.56 $60,746.80

Table 2: Amortization Schedule for the First 2 Years

5 Lease Amortization and Journal Entries Cal-

culation
To solve the problem and run the Python code with the specified parameters,
we need to perform the following steps:

5.1 Parameters
The key parameters for the lease problem are:

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 • Annual Payment: $10,000

• Interest Rate: 10%

• Number of Periods: 4 years

• Payment Increase: 3% annually

• Starting Year: 2021

5.2 Python Code Explanation

The provided Python code performs the following calculations:

1. Calculate Present Value Annuity Factor (PVAF):

def calculate_pvaf(rate, periods, payment_timing=’end’):

This function calculates the PVAF for an annuity based on the interest
rate, number of periods, and payment timing (either ’end’ or ’begin’). For
beginning-of-year payments, the formula adjusts to account for the extra
period.

2. Calculate Lease Liability and ROU Asset:

def calculate_lease_liability(payment, pvaf):

This function computes the initial lease liability and Right of Use (ROU)
asset by multiplying the annual payment by the PVAF.

3. Generate Amortization Schedule:

def generate_amortization_schedule(lease_liability, payment, rate, periods, paym

This function creates an amortization schedule for the lease. It tracks the
balance, interest payment, principal repayment, and ending balance each
year. The payment increases by a specified percentage each year.

4. Generate Journal Entries:

def generate_journal_entries(lease_liability, payment, rate, periods, payment_in

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 This function produces journal entries for both the lessee and lessor. The
entries include initial recognition of the ROU asset and lease liability,
as well as annual entries for rental expense, interest expense, and cash
payments.

5.3 Example Usage

For the given problem parameters, the following values are used in the calcula-
tions:

• Annual Payment: $10,000

• Interest Rate: 10%

• Number of Periods: 4 years

• Payment Increase: 3% annually

• Starting Year: 2021

5.4 Amortization Schedule

The amortization schedule displays the yearly payment, interest, principal, and
balance. The initial balance is included in the first line.

5.5 Journal Entries

The journal entries for the lessee include:

• Initial recognition of ROU asset and lease liability.

• Annual entries for rental expense, interest expense, and reduction of the
ROU asset.

The lessor’s journal entries include:

• Cash receipt.

• Reduction in lease receivable and recognition of interest revenue.

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6 Lease Amortization and Journal Entries
6.1 Lease Liability and ROU Asset
The initial lease liability and Right of Use (ROU) asset are calculated as:

Lease Liability and ROU Asset: $34,868.52

6.2 Amortization Schedule

The amortization schedule is shown below:

Year Payment Interest Principal Balance

Initial Balance $34,868.52
2021 $10,000.00 $3,486.85 $6,513.15 $28,355.37
2022 $10,300.00 $2,835.54 $7,464.46 $20,890.91
2023 $10,609.00 $2,089.09 $8,519.91 $12,371.00
2024 $10,927.27 $1,237.10 $9,690.17 $2,680.83

Table 3: Amortization Schedule

6.3 Lessee’s Journal Entries

Year 2021:

• Debit:

– ROU Asset: $34,868.52

• Credit:

– Lease Liability (payment): $34,868.52

Year 2021:

• Debit:

– Rental Expense: $10,000.00

– Interest Expense: $3,486.85

– Lease Liability: $6,513.15

• Credit:

– Cash (payment): $10,000.00

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 – Accrued Interest: $3,486.85

– ROU Asset: $6,513.15

Year 2022:

• Debit:

– Rental Expense: $10,300.00

– Interest Expense: $2,835.54

– Lease Liability: $7,464.46

• Credit:

– Cash (payment): $10,300.00

– Accrued Interest: $2,835.54

– ROU Asset: $7,464.46

Year 2023:

• Debit:

– Rental Expense: $10,609.00

– Interest Expense: $2,089.09

– Lease Liability: $8,519.91

• Credit:

– Cash (payment): $10,609.00

– Accrued Interest: $2,089.09

– ROU Asset: $8,519.91

Year 2024:

• Debit:

– Rental Expense: $10,927.27

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 – Interest Expense: $1,237.10

– Lease Liability: $9,690.17

• Credit:

– Cash (payment): $10,927.27

– Accrued Interest: $1,237.10

– ROU Asset: $9,690.17

6.4 Lessor’s Journal Entries

Year 2021:

• Debit:

– Cash (payment): $10,000.00

• Credit:

– Lease Receivable: $6,513.15

– Interest Revenue: $3,486.85

Year 2022:

• Debit:

– Cash (payment): $10,300.00

• Credit:

– Lease Receivable: $7,464.46

– Interest Revenue: $2,835.54

Year 2023:

• Debit:

– Cash (payment): $10,609.00

• Credit:

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 – Lease Receivable: $8,519.91

– Interest Revenue: $2,089.09

Year 2024:

• Debit:

– Cash (payment): $10,927.27

• Credit:

– Lease Receivable: $9,690.17

– Interest Revenue: $1,237.10

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