Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $19,000 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)		4			4			4			4
Asset’s useful life (years)		4			5			5			7
Lessor’s implicit rate (known by lessee)		12	%		12	%		12	%		12	%
Residual value:
Guaranteed by lessee		0		$	7,600		$	3,800			0
Unguaranteed		0			0		$	3,800		$	7,600
Purchase option:
After (years)		none			3			4			3
Exercise price		n/a		$	8,800		$	2,800		$	4,800
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

			Situations
			1	2	3	4
A	The Lessor’s:
	1	Lease payments	76000	83600	79800	61800
	2	Gross investment in the lease	76000	83600	83600	83600
	3	Net investment in the lease	64635	69465	69465	59937
B	The lessee’s:
	4	Lease payments	76000	83600	79800	61800
	5	Right-of-use asset	64635	69465	67797	54527
	6	Lease payable	64635	69465	67797	54527

Lease payments

Situation 1 = 19000*4= 76000

Situation 2 = (19000*4)+7600 = 83600

Situation 3 = (19000*4)+3800 =79800

Situation 4 = (19000*3)+4800 = 61800

Gross investment in the lease

Situation 1 = 76000

Situation 2 = 83600

Situation 3 = 79800+3800 = 83600

Situation 4 = 61800+7600 = 69400

Net investment in the lease

Situation 1 = 19000*3. 40183= 64635

Present value of annuity due of $1 of n= 4, i = 12% = 3.40183

Situation 2 = (19000*3. 40183)+(7600*0. 63552) =65635.77 + 4829.95 = 69465

Present value of $1 of n= 4, i = 12% = 0.63552

Situation 3 = (19000*3. 40183)+((3800+3800) *0. 63552) =65635.77 +4829.95 = 69465

Situation 4 = (19000*2. 69005)+((4800 + 7600 )*0. 71178) = 51110.95 + 8826.07 = 59937

Present value of annuity due of $1 of n= 3, i = 12% = 2.69005

Present value of $1 of n= 3, i = 12% = 0.71178

Right-of-use asset or lease payable

Situation 1 = 64635

Situation 2 = 69465

Situation 3 = (19000*3. 40183)+(3400*0. 63552) =65635.77 + 2160.77 = 67797

Situation 4 = (19000*2. 69005)+(4800*0. 71178) = 51110.95 + 3416.54 = 54527