Questions:
Our company has leased a supercomputer for the next five years.

What will be the two ways in which this transaction will show up on our income statement in the following years?

The supercomputer has a fair value of $12,000,000. The lease payment is $2,400,000 per year (with the first payment due at the start of 2024). Our company's interest rate for a similar type of debt is 4.79%. The useful life of the supercomputer is 7 years; however, we only intend to use it till 2028. 

Calculate the total charge to our income statement in the year 2026 (assuming straight line depreciation)?

Reference answers:
The impact on the income statement will come in two forms: 
1. The interest expense associated with the lease.
2. The amortization of the lease asset itself.

We can start by looking at the present value of the lease, starting right before the first payment in 2024.

PV = 2,400,000 / (1 + 0.0479)^0 + 2,400,000 / (1 + 0.0479)^1 + 2,400,000 / (1 + 0.0479)^2 + 2,400,000 / (1 + 0.0479)^3 + 2,400,000 / (1 + 0.0479)^4 = $10,951,959.84 

# Step 1: Interest Expense

Starting carrying amount is = PV of lease payments - the payment made at the beginning = 10,951,959.84 - 2,400,000= $8,551,959.84

Interest Expense = Carrying Amount * interest rate

The remaining amount of the payment reduces the carrying about for the following year. We can repeat this process to find the interest expense in 2026. 

| Year                   | Carrying amount | Interest expense | Payment (Lease payment) - at the end of the period | Principal repayment (Lease payment - Interest expense) | Ending Carrying amount (Opening carrying amount - principal repayment) |
|-----------------------------|--------------|----------------|-----------|--------------------|--------------------|
| 2024          | $8,551,959.84 | $409,638.88    | $0.00     | $0.00              | $8,551,959.84       |
| 2025          | $8,551,959.84 | $409,638.88    | $2,400,000.00 | $1,990,361.12  | $6,561,598.72       |
| 2026          | $6,561,598.72 | $314,300.58    | $2,400,000.00 | $2,085,699.42  | $4,475,899.30       |

# Step 2: Amortization of the Lease Asset

The deferred tax asset is recorded at the present value of the lease payments in the first year, which we calculated as $10,951,959.84.

With straight line depreciation, we will amortize a constant amount of the asset over the five year lease term. This amount is the total initial carrying amount (the PV of the loan, $10,951,959.84) divided by the total number of years (5). So, $10,951,959.84 / 5 =  $2,190,391.97 per year through 2029.

# Step 3: Charge to the income statement in 2026

The amount charged to the income statement in the year 2026 will include:
1. The interest expense in that year: $314,300.58
2. The amortization of the lease asset recognized at the beginning: $2,190,391.97

Therefore, the total charge = $314,300.58 + $2,190,391.97 = $2,504,692.55