Question

Below describes a sales-type lease in which annual lease payments of $10,000 are payable at the beginning of each year. Below is a finance lease for the lessee.

Lease term (years) : 4 years

Asset’s useful life (years) : 7 years

Lessor’s implicit rate (known by lessee) : 11%

Guranteed residual value by lessee : -

Unguaranteed residual value : $4,000

Purchase option after 3 years

Purchase option, exercise price : $3,000

Purchase option, reasonably certain? : yes

Complete the following and show solutions:

A. The Lessor

1. Lease payments

2. Gross investment in the lease

3. Net investment in the lease

B. The Lessee

4. Lease payments

5. Right of use asset

6. Lease payable

Answer 1

A. The Lessor:

  1. Lease payments :

Lease Payments	$
Periodical Lease Payments (10000*4)	40000
Recievable from Purchase Option	3000
Total-	43000

2. Gross investment in the lease :

Gross Investment = Add all Future Economic benefits	$
Periodical lease payments( $10000*4yrs)	40000
Guaranteed Residual Value	0
Unguaranteed Residual Value	4000
Purchase Option	3000
Total	47000

3. Net investment in the lease :

Net Investment= Present Value Of All Future Economic Benefits	$
Periodical Lease Payments ($40000*3.1024)	31024.21
Unguaranteed Residual Value($4000*0.6587)	2634.92
Purchasre option($3000*0.7312)	2193.57
Total	35852.7

B. The Lessee :

4. Lease payments :

Lease Payments	$
Periodical Lease Payments (10000*4)	40000
Payable from Purchase Option	3000
Total	43000

5. Right of use asset :

Yes.

6. Lease payable:

Present Value Of All Lease Payments = $10000*3.1024= $31024.21

Present Value Factors @11% Implicit Rate

Year	P V F
1	0.9009
2	0.8116
3	0.7312
4	0.6587
	3.1024