Question

For each of the three independent situations below determine the amount of the annual lease payments. Each describes a finance lease in which annual lease payments are payable at the beginning of each year. Each lease agreement contains an option that permits the lessee to acquire the leased asset at an option price that is sufficiently lower than the expected fair value that the exercise of the option appears reasonably certain. (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)		6			6			5
Lessor's rate of return		9	%		10	%		8	%
Fair value of leased asset	$	68,000		$	424,000		$	189,000
Lessor's cost of leased asset	$	54,000		$	424,000		$	149,000
Purchase option:
Exercise price	$	14,000		$	54,000		$	26,000
Exercisable at end of year:		6			6			4
Reasonably certain?		yes			no			yes

Determine the annual lease payments for each situation: (Round your intermediate and final answers to the nearest whole dollar amount.)

Answer 1

Answer:

	Annual lease payments
Situation 1	$17,020
Situation 2	$104,352
Situation 3	$51,768

Calculations:

Situation 1:
Amount to be recovered (fair value)	$68,000
(Less): Present value of Bargain purchase option	$8,348
[$14,000 x 0.5963 PV factor (9%, 6 years)]
Amount to be recovered through periodic lease payments	$76,348
÷ Present value annuity factor (9%, 6 years)	4.4859
= Annual lease payments	$17,020
Situation 2:
Amount to be recovered (fair value)	$424,000
(Less): Present value of Bargain purchase option	$30,483
[$54,000 x 0.5645 PV factor (10%, 6 years)]
Amount to be recovered through periodic lease payments	$454,483
÷ Present value annuity factor (10%, 6 years)	4.3553
= Annual lease payments	$104,352
Situation 3:
Amount to be recovered (fair value)	$189,000
(Less): Present value of Bargain purchase option	$17,696
[$26,000 x 0.6806 PV factor (8%, 5 years)]
Amount to be recovered through periodic lease payments	$206,696
÷ Present value annuity factor (8%, 5 years)	3.9927
= Annual lease payments	$51,768