Question

Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the end 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)	9	20	4
Lessor's rate of return (known by lessee)	12%	10%	10%
Lessee's incremental borrowing rate	10%	11%	9%
Fair value of lease asset	$770,000	$1,065,000	$270,000

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

Solution:

Annual Lease Payments calculated by the lessor

A1,

A2.

A3.

For Lessee, the value of lease liability depends upon the borrowing rate that needs to be used, In this case the lessee knows the lessors implicit rate, in that scenario the lessee has to consider the lower of the two rates

B

1. In Situation 1 lessee rate (10% is lower)

2. In Sitution 2, The lessors rate is lower, hence the lease liability is the same as the fair value of the asset = $1065000

3. In Situation 3, lessee rate (9% is lower)

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