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) 6 9 7 10 Lessor's rate of return 9 % 10 % 8 % 11 % Fair value of lease asset $ 54,000 $ 354,000 $ 79,000 $ 469,000 Lessor's cost of lease asset $ 54,000 $ 354,000 $ 49,000 $ 469,000 Residual value: Estimated fair value 0 $ 54,000 $ 11,000 $ 49,000 Guaranteed fair value 0 0 $ 11,000 $ 54,000 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.

Answer 1

Answer

	Lease Payments	Residual Value Gurantee	PV value of lease Payments	PV value of residual value gurantee	Right of Asset/ Lease Liability
Situation 1	$12,038	0	$54,000	0	$54 000
Situation 2	$57,492	0	$3,31,099	0	$3,31,099
Situation 3	$13,941	0	$72,581	0	$72,581
Situation 4	$76,408	$49,000	$4,49,981	$1,761	$4,51,742

Situations	1	2	3	4
Fair Value	$54,000	$3,54,000	$79,000	$4,69,000
Lessor's Cost of Lease	$54,000	$3,54,000	$49,000	$469,000
Lease Term	6	9	7	10
Rate of Return	9%	10%	8%	11%
Esttimated Fair Value	0	$54,000	$11,000	$49,000
Guranteed Fair Value	0	0	$11,000	$54,000

Situation 1

Present value of annuity factor for n = 6 and i = 9% is 4.48592

Lease Payments = $54,000 / 4.48592 = $12,038

Situation 2

Lease Payments = (fair value - present value of residual value)/Present value of annuity due factor

PV value of residual value = $54,000 * 0.4241 = $22,901

Present value of annuity due factor for n = 9 and i = 10% is 5.75902

Present Value of lease payment = ($3,54,000 - $22,901)

= $3,31,099

Lease Payment = $3,31,099/5.75902

= $57,492

Situation 3

PV value of residual Value = $11,000 * 0.5835 = $6,419

PV value factor for n = 7 and i = 8% is 5.2064

Lease Payments = ($79,000 - $6,419)/5.2064 = $13,941

Presrnt Value of Lease Payment = $79,000 - $6,419 = $72,581

Situation 4

PV of guaranted residual Value = $54,000 * 0.3522 = $19,019

Present Value factor n = 10 & i = 11% is 5..8892

Lease Payments = ($4,69,000 - $19,019)/5.8892 = $76,408

Present Value of lease Payment = $4,69,000 - $19,019 = $4,49,981

PV value of residual Value Guarantee = $5000 * 0.3522 = $1,761