Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $145,000 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)	6	6	7	7
Lessor's and lessee's interest rate	11%	10%	12%	12%
Residual value:
Estimated fair value	0	$59,000	$8,900	$59,000
Guaranteed by lessee	0	0	$8,900	$69,000

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

Answer is complete but not entirely correct.

Situation 1 2 3 4 A The lessor’s: 1. Total lease payments $870,000selected answer correct $870,000selected answer correct $1,015,000selected answer correct $1,015,000selected answer correct 2. Gross investment in the lease 870,000selected answer correct 929,000selected answer correct 1,032,800selected answer incorrect 1,143,000selected answer incorrect 3. Net investment in the lease 680,906selected answer correct 776,514selected answer incorrect 805,193selected answer incorrect 799,054selected answer incorrect B The lessee’s: 4. Total lease payments 870,000selected answer correct 870,000selected answer correct 1,023,900selected answer incorrect 1,084,000selected answer incorrect 5. Right-of-use asset 680,906selected answer correct 694,666selected answer correct 800,325selected answer incorrect 772,365selected answer incorrect 6. Lease liability 680,906selected answer correct 694,666selected answer correct 800,325selected answer incorrect 772,365selected answer incorrect

Answer 1

Answer :

		Situation
		1	2	3	4
A	The lessor’s:
	1. Total lease payments	(145,000 x 6) = 870,000	(145,000 x 6) = 870,000	(145,000 x 7) =1,015,000	(145,000 x 7)      =1,015,000
	2. Gross investment in the lease	(145,000 x 6) = 870,000	(870,000 + 59,000) = 929,000	(1,015,000 + 8,900) = 1,023,900	1,015,000 + 59,000      = 1,074,000
	3. Net investment in the lease	(145,000 x 4.6959) =680,906	(145,000 x 4.7908) + (59,000 x 0.5645) =694,666 + 33,306 = 727,972	(1,015,000 x 5.1114) + (8,900x 0.4523) = 5 ,188,071 + 4,025.47 = 5,192,096.47	(1,015,000 x 5.1114) + (59,000 x 0.4523) = 5,188,071 + 26,686   =5,214,757
B	The lessee’s:
	4. Total lease payments	(145,000 x 6) = 870,000	(145,000 x 6) = 870,000	(145,000 x 7)      =1,015,000	(145,000 x 7)      =1,015,000
	5. Right-of-use asset	(145,000 x 4.6959) = 680,906	(145,000 x 4.7908) = 694,666	(1,015,000 x 5.1114)      = 5,188,071	(1,015,000 x 5.1114)      = 5,188,071
	6. Lease liability	680,906	(145,000 x 4.7908) = 694,666	(1,015,000 x 5.1114)      = 5,188,071	(1,015,000 x 5.1114)      = 5,188,071