Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $19,500 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)		5			5			5			5
Asset’s useful life (years)		5			6			6			8
Lessor’s implicit rate (known by lessee)		9	%		9	%		9	%		9	%
Residual value:
Guaranteed by lessee		0		$	7,800		$	3,900			0
Unguaranteed		0			0		$	3,900		$	7,800
Purchase option:
After (years)		none			4			5			3
Exercise price		n/a		$	8,900		$	2,900		$	4,900
Reasonably certain?		n/a			no			no			yes

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

	Situation 1 2 3 4 A. The lessor’s: 1. Total lease payments 2. Gross investment in the lease 3. Net investment in the lease B. The lessee’s: 4. Total lease payments 5. Right-of-use asset 6. Lease liability

Answer 1

		Situation
		1	2	3	4
A	The Lessors
	Lease payments	97,500	97,500	97,500	97,500
	Gross investment in the lease	97,500	105,300	105,300	105,300
	Net investment in the lease	82,674	87,744	87,744	87,744
B	The Lessee's
	Lease payments	97,500	105,300	101,400	97,500
	Right-of-use asset	82,674	87,744	85,209	82,674
	Lease payable	82,674	87,744	85,209	82,674

Situation 1
A. The lessor's:

1. Minimum lease payments = $19500 x 5 = $97500
2. Gross investment in the lease = $19500 x 5 = $97500
3. Net investment in the lease = $19500 x PVAD9%,5 = $19500 x 4.2397 = $82674

B. The lessee's:

1. Minimum lease payments = $19500 x 5 = $97500
2. Right-of-use asset = $19500 x PVAD9%,5 = $19500 x 4.2397 = $82674
3. Lease payable = $82674


Situation 2
A. The lessor's:

1. Minimum lease payments = $19500 x 5 = $97500
2. Gross investment in the lease = ($19500 x 5) + $7800 = $105300
3. Net investment in the lease = ($19500 x PVAD9%,5) + ($7800 x PVIF9%,5)
= (19500 x 4.2397) + (7800 x 0.650) = $87744

B. The lessee's:
1. Minimum lease payments = $19500 x 5 = $97500 + $7800 = $105300
2. Right-of-use asset = ($19500 x PVAD9%,5) + ($7800 x PVIF 9%, 5) = ($19500 x 4.2397) + (7800 x 0.650) = $87744
3. Lease payable = $87744



Situation 3
A. The lessor's:

1. Minimum lease payments = $19500 x5 = $97500
2. Gross investment in the lease = ($19500x 5) + $7800 = $105300
3. Net investment in the lease = ($19500 x PVAD9%,5) + ($7800 x PVIF9%,5)
= (19500 x 4.2397) + ($7800 x 0.650) = $87744


B. The lessee's:
1. Minimum lease payments = ($19500 x 5) + $3900 = $101400
2. Right-of-use asset = ($19500 x PVAD9%,5) + ($3900 x PVIF9%,5)
= (19500 x 4.2397) + (3900 x 0.650) = $85209
3. Lease payable = $85209



Situation 4
A. The lessor's:
1. Minimum lease payments = $19500 x5 = $97500
2. Gross investment in the lease = ($19500x 5) + $7800 = $105300
3. Net investment in the lease = ($19500 x PVAD9%,5) + ($7800 x PVIF9%,5)
= (19500 x 4.2397) + ($7800 x 0.650) = $87744


B. The lessee's:
1. Minimum lease payments = ($19500 x 5) = $97500
2. Right-of-use asset = ($19500 x PVAD9%,5)
= (19500 x 4.2397)=$82674
3. Lease payable = $82674