Question

Each of the three 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 $1and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

	Situation
	1	2	3
Lease term (years)	10	20	5
Lessor's rate of return (known by lessee)	11%	9%	12%
Lessee's incremental borrowing rate	12%	10%	11%
Fair value of lease asset	$720,000	$1,100,000	$305,000

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. (Round your answers to the nearest whole dollar.)

Answer 1

	1	2	3
fair value of lease asset (a)	$720,000	$1,100,000	$305,000
lease term	10	20	5
lesser's rate of return	11%	9%	12%
pvifa (b)	5.889	9.129	3.605
annual lease payment (c) = (a) /(b)	$122,261.84	$120,495.13	$84,604.72
lease payable (d)= (c) * (b)	$720,000	$1,100,000	$305,000

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