Question

Ivanhoe Corp., which uses ASPE, leases a car to Jaimme DeLory on June 1, 2020. The term of the non-cancellable lease is 48 months. The following information is provided about the lease. 1. The lessee is given an option to purchase the automobile at the end of the lease term for $5,400. 2. The automobile’s fair value on June 1, 2020, is $30,100. It is carried in Ivanhoe’s inventory at $20,600. 3. The car has an economic life of seven years, with a $2,000 residual value at the end of that time. The car’s estimated fair value is $10,600 after four years, $7,500 after five years, and $2,400 after six years. 4. Ivanhoe wants to earn a 12% rate of return (1% per month) on any financing transactions. 5. Jaimme DeLory represents a reasonable credit risk and no future costs are anticipated in relation to this lease. 6. The lease agreement calls for a $1,100 down payment on June 1, 2020, and 48 equal monthly payments on the first of each month, beginning June 1, 2020. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Collapse question part

(a) Determine the amount of the monthly lease payment

Answer 1

Since the fair value of the Automobile at the end of 4 years is $ 10,600, while the lessee is given the option of purchase at the end of lease term is $ 5,400, therefore it is likely that the lessee will exercise the option of purchase. Therefore the value to be received at the end of lease term i.e. 4 years (or say 48 months) is $ 5,400
Computation of Monthy Lease payment
Particulars	Working	Amount
Fair value of Automobile as on June 1, 2020		$        30,100
Less:- Down Payment		$        (1,100)
Net amount financed under Lease		$        29,000
Less:- Present Value of amount to be received at the end of year 4
Amount to be received at the end of year 4	$5,400
P.V. Factor at the end of 48th month ( @1% per month)	0.6203
Present Value of amount to be received at the end of year 4	$5400*0.6203	-3349.62
Present Value of amount to be in the form of Monthly Lease Repayments		$ 25,650.38
Annuity for the lease rentals for 48 months @ 1% (As per working note 1)		38.3537
Monthly Lease Payment	$25,650.38/38.3537	668.79
Working Note 1
Annuity for the lease rentals for 48 months
P.V. Factor for the first month	1
Annuity for the 47 months	37.3537
Annuity for the lease rentals for 48 months (As per working note 1)	38.3537