Question

Calculate the annual lease payments due from the lessor, and prepare lease amortization schedule, for each of the following scenarios:

Scenario                                                                                      A                          B                         C

Lease Term                                                                         10 Years               20 Years               4 Year

Fair Value of Lease Asset                                              $600,000             $900,000             $200,000

Lesse's Incremental Borrowing Rate                                         12%              10%                    10%

Lessor's Rate of Return (known by lessee)                             11%                  9%                    12%

Payment Due                                                                     End of Year            End of Year         End of Year

Answer 1

Annual Lease Payment Calculation (Using Excel Formula)

Fair Value of Asset is discounted by using Lessor's Rate of Return

	A	B	C
Lease Term	10	20	4
Fair Value of Leased Asset	600000	900000	200000
Lesse's Incremental Borrowing Rate	12%	10%	10%
Lessor's Rate of Return (known by lessee)	11%	9%	12%
Payment Due	End of Year	End of Year	End of Year
Payment	=PMT(0.11,10,-600000,,0)	=PMT(0.09,20,-900000,,0)	=PMT(0.12,4,-200000,,0)
	$101,880.86	$98,591.83	$65,846.89

For amortization Schedule, first calculate lease liability

	A	B	C
Lease Liability	=PV(0.12,10,-101881,,0)	=PV(0.1,20,-98592,,0)	=PV(0.1,4,-65846,,0)
	$575,650.37	$839,369.27	$208,722.96

Amortization Schedule

A
Lease Amortization Schedule
Period	Cash	Expense	Liability Reduction	Liability Balance
0				575,650
1	101,881	69,078	32,803	542,848
2	101,881	65,142	36,739	506,108
3	101,881	60,733	41,148	464,961
4	101,881	55,795	46,086	418,875
5	101,881	50,265	51,616	367,259
6	101,881	44,071	57,810	309,449
7	101,881	37,134	64,747	244,702
8	101,881	29,364	72,517	172,186
9	101,881	20,662	81,219	90,967
10	101,881	10,913	90,968	(0)

B
Lease Amortization Schedule
Period	Cash	Expense	Liability Reduction	Liability Balance
0				839,369
1	98,592	83,937	14,655	824,714
2	98,592	82,471	16,120	808,594
3	98,592	80,859	17,732	790,862
4	98,592	79,086	19,506	771,356
5	98,592	77,136	21,456	749,900
6	98,592	74,990	23,602	726,298
7	98,592	72,630	25,962	700,336
8	98,592	70,034	28,558	671,777
9	98,592	67,178	31,414	640,363
10	98,592	64,036	34,555	605,808
11	98,592	60,581	38,011	567,797
12	98,592	56,780	41,812	525,985
13	98,592	52,598	45,993	479,991
14	98,592	47,999	50,593	429,399
15	98,592	42,940	55,652	373,747
16	98,592	37,375	61,217	312,530
17	98,592	31,253	67,339	245,191
18	98,592	24,519	74,073	171,118
19	98,592	17,112	81,480	89,638
20	98,592	8,954	89,638	(0)

C
Lease Amortization Schedule
Period	Cash	Expense	Liability Reduction	Liability Balance
0				208,723
1	65,847	20,872	44,975	163,748
2	65,847	16,375	49,472	114,276
3	65,847	11,428	54,419	59,857
4	65,847	5,990	59,857	(0)

Last Expense is adjusted with few dollars due to rounding off differences

Expense amount is calculated by multiplying Incremental borrowing rate with Liability balance at end pf previous year