Question

Each of the four independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit rate of return. (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			7			5			8
Lessor's rate of return		10	%		11	%		9	%		12	%
Fair value of lease asset	$	66,000		$	366,000		$	91,000		$	481,000
Lessor's cost of lease asset	$	66,000		$	366,000		$	61,000		$	481,000
Residual value:
Estimated fair value		0		$	66,000		$	23,000		$	35,000
Guaranteed fair value		0			0		$	23,000		$	40,000

Required:
a. & b. Determine the amount of the annual lease payments as calculated by the lessor and the amount the lessee would record as a right-of-use asset and a lease liability, for each of the above situations. (Round your answers to the nearest whole dollar amount.)

	Lease Payments	Residual Value Guarantee	PV of Lease Payments	PV of Residual Value Guarantee	Right of Use Asset / Lease Liability
Situation 1	18928	0	66000	0	66000
Situation 2	?	?	?	?	?
Situation 3	?	?	?	?	?
Situation 4	?	?	?	?	?

Answer 1

	Lease payments	Residual value guarantee	PV of lease payments	PV of residual value Guarantee	Right-of-use Asset/lease liability
Situation 1	18928.25	0	66000	0	66000
Situation 2	63896.57	0	334211	0	334211
Situation 3	17938.13	0	76052.3	0	76052.3
Situation 4	83549.58	5000	464844.8	2019.4	464844.8

Situation 1

Lease payments = 66000/3.486851= 18928.25

Present value of annuity due factor for n = 4 and i=10% is 3.486851

Situation 2

Lease payments = (fair value – present value of residual value) / Present value of annuity due factor

PV of residual value = 66000*0.4816 =31789.45

Present value factor for n = 7 and i = 11% is 0.4816

Present value of annuity due factor for n = 7 and i=11% is 5.2305

Lease payments = (366000-31789)/ 5.2305 = $63896.57

Present value of lease payments = (fair value – present value of residual value) = 366000-31789=334211

Situation 3

Lease payments = (fair value – present value of residual value) / Present value of annuity due factor

PV of residual value = 23000*0.6499= $14947.7

Present value factor for n = 5 and i = 9% =0.6499

Present value of annuity due factor for n = 5 and i=9% is 4.2397

Lease payments = (91000-14947.7)/ 4.2397 = $17938.13

Present value of lease payments = (fair value – present value of residual value) = (91000-14947.7= 76052.3

Situation 4

Lease payments = (fair value – present value of guaranteed residual value) / Present value of annuity due factor

PV of guaranteed residual value = 40000*0.40388= $16155.2

Present value factor for n = 8 and i = 12% is 0.40388

Present value of annuity due factor for n = 8 and i=12% is 5.5637

Lease payments = (481000-16155.2)/5.5637= $83549.58

Present value of lease payments = (fair value – present value of residual value) = 481000-16155.2=464844.8

PV of residual value Guarantee = 5000*0.40388= 2019.4