Question

Each of the three 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
Lease term (years)	11	21	5
Lessor's rate of return (known by lessee)	10%	8%	11%
Lessee's incremental borrowing rate	11%	9%	10%
Fair value of lease asset	$770,000	$1,150,000	$355,000

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.)

Answer 1

Solution:

Fair vlaue of the asset/ PVAF(11%, 0-10) since lease payment is being made at the beginning of the year

here 10years = 11years -1year =10years

Situation 1

Annual lease payment =$770,000/PVAF(11%,0-10)

Present value of annuity factor of 11% For 10 years = 5.882 (0.900+0.811+0.731+0.658+0.593+0.534+0.481+0.433+0.390+0.352)=5.882

PVAF(11%, 0-10) = 5.882+1 = 6.882

Annual lease payment = $770,000/6.882

=$111,886

Situation:2

Annual lease payment = $1,150,000/PVAF(9%,0-20) Here(20-1=20)

Present value of annuity factor of 9% for 20 years = 9.118 (0.917+0.841+0.772+0.708+0.649+0.596+0.547+0.501+0.460+0.422+0.387+0.355+0.326+0.299+0.274+0.251+0.231+0.211+0.194+0.178) =9.118

PVAF(9%, 0-20) = 9.118+1= 10.118

Annual lease payment =$ 1,150,000/10.118

=$ 113,659

Situatuon 3:

Annual lease payment =$355,000(10%, 0-4) (5-1=4)

Present value of annuity facotr of 10% for 4years = 3.169 (0.909+0.826+0.751+0.683)

PVAF(10%, 0-4) = 3.169+1 = 4.169

Annual Lease payment = $355,000/4.169

=$ 85,152

b. Cost of the asset will be itself can be determined as an amount that lesse is required to be recorded as an asset and liability

Situation1: Cost of the asset = $111,886 X 5.882 = $658,113

Situation2: Cost of the asset = $113,658 X 9.118 =$1,036,334

Situatuon3: Cost of the asset =$85,152 X 3.169 = $269,847