Question

.

WFFm has found a flatbed trailer on which it could load the tractor to move it. The trailer is offered for ata cash only price of $15,000, but could be leased for 4 years for an annual payment of $3000.   A payment is due at the inception of the lease, then at the end of each year, for a total of 5 payments. The effective interest rate for a trailer lease is 3.99%. The useful life of this piece of equipment is 10 years.
Data
Cost
Annual Lease payment
Interest rate
Term in Years
Economic Life (Years)
Present Value of payments
Year (Time)	Purchase	PV of Lease pmts
0
1
2
3
4
Totals
Lease or Buy?	Lease
Lease Type Criteria				% PV/FMV	Yes/No?
Ownership Transfers at end of lease?
Purchase Option?
Lease term 75% or > than economic life?
PV of pmts >90% of Fair Value?
Special Purpose?
Classifiy the Asset? (PP&E, Operating , or Finance )
Lease Amortization Table
Payment Date	Cash Payment	Interest Expense	Decrease in Balance	Balance
PV of payments
First payment
Dec 31 of yr 1
Dec 31 of yr 2
Dec 31 of yr 3
Dec 31 of yr 4
Totals

Answer 1

Data
Cost	$15,000
Annual Lease Payment	$3,000
Interest Rate	3.99%
Term in years	4 years
Economic Life	10 years
Present value of payments
Year	Purchase	PV of Lease Pmts	PV factor
0	$15,000	$3,000.00
1		2884.80	0.9616
2		2774.10	0.9247
3		2667.90	0.8893
4		2565.30	0.8551
Total	$15,000	$13,892
Lease or buy?	Lease
Lease Type Criteria
Ownership transfer at the end of the lease	Yes
Purchase Option	Yes
Lease Term 75% or >than economic life	No
PV of pmts >90% of Fair Value	Yes
Special Purpose	No
Classify the Asset	Operating
Lease Amortization Table
Payment Date	Cash Payment	Interest Expenses	Decrease in Balance	Balance
PV of Payments				$13,892
First Payment	$3,000		$3,000.00	$10,892
Dec 31 of yr 1	$3,000	$434.59	$2,565.41	$8,327
Dec 31 of yr 2	$3,000	$332.23	$2,667.77	$5,659
Dec 31 of yr 3	$3,000	$225.79	$2,774.21	$2,885
Dec 31 of yr 4	$3,000	$115.10	$2,884.90	($0)
Totals	$15,000	$1,108	$13,892