Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $100,000 are payable at the beginning of each year. Each is a finance lease for the lessee. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

	Situation
	1	2	3	4
Lease term (years)	7	7	8	8
Lessor's and lessee's interest rate	9%	11%	10%	12%
Residual value:
Estimated fair value	0	$50,000	$8,000	$50,000
Guaranteed by lessee	0	0	$8,000	$60,000

Determine the following amounts at the beginning of the lease. (Round your intermediate and final answers to the nearest whole dollar amount.)

	Situation
		1	2	3	4
A.	The Lesser's
	1. Lease payment
	2. Gross investment in the Lease
	3. Net Investment in the Lease
B.	The Lessee's
	1. Lease payment
	2. Gross investment in the Lease
	3. Net investment in the Lease

  

Answer 1

Situation 1

A. The lessor's:

1. Minimum lease payments = $100000 x 7 = $700000

2. Gross investment in the lease = $100000 x 7 = $700000

3. Net investment in the lease = $100000 x PVAD9%,7 = $100000 x 5.48592 = $548592

B. The lessee's:

1. Minimum lease payments = $100000 x 7 = $770000

2. Right-of-use asset = $100000 x PVAD9%,7 = $100000 x 5.48592 = $548592

3. Lease payable = $548592

Situation 2

A. The lessor's:

1. Minimum lease payments = $100000 x 7 = $700000

2. Gross investment in the lease = ($100000 x 7) + $50000 = $750000

3. Net investment in the lease = ($100000 x PVAD11%,7) + ($52000 x PVIF11%,7)

= (100000 x 5.23054) + (50000 x 0.48166) = $547137

B. The lessee's:

1. Minimum lease payments = $100000 x 7 = $700000

2. Right-of-use asset = $100000 x PVAD11%,7 = $100000 x 5.23054 = $523054

3. Lease payable = $523054

Situation 3

A. The lessor's:

1. Minimum lease payments = $100000 x 8 = $800000

2. Gross investment in the lease = ($100000 x 8) + $16000 = $816000

3. Net investment in the lease = ($100000 x PVAD10%,8) + ($16000 x PVIF10%,8)

= (100000 x 5.86842) + ($16000 x 0.46651) = $594306

B. The lessee's:

1. Minimum lease payments = ($100000 x 8) + $8000 = $808000

2. Right-of-use asset = ($100000 x PVAD10%,8) + ($8000 x PVIF10%,8)

=(100000 x 5.86842) + (8000 x 0.46651) = $590574

3. Lease payable = $590574

Situation 4

A. The lessor's:

1. Minimum lease payments = $100000 x 8 = $800000

2. Gross investment in the lease = ($100000 x 8) + $110000 = $910000

3. Net investment in the lease = ($100000 x PVAD12%,8) + ($110000 x PVIF12%,8)

=(100000x 5.56376) + (110000 x 0.40388) = $600803

B. The lessee's:

1. Minimum lease payments = ($100000 x 8) + $60000 = $860000

2. Right-of-use asset = ($100000 x PVAD12%,8) + ($60000 x PVIF12%,8)

= (100000 x 5.56376) + (60000 x 0.40388) = $580609

3. Lease payable = $580609