Question

Please let me know what the formulas are to calculate the following: I am seeing different answers and I don't know which is correct.

E 15–26
Lease concepts; finance/sales-type leases; guaranteed and unguaranteed residual value
Each of the four independent situations below describes a sales-type lease in which annual lease payments of $100,000 are payable at the beginning of each year.
Each is a finance lease for the lessee. Determine the following amounts at the beginning of the lease:
A. The lessor’s:
1. Lease payments
2. Gross investment in the lease
3. Net investment in the lease
B. The lessee’s:
4. Lease payments
5. Right-of-use asset
6. Lease liability
		Situation
		1	2	3	4
	Lease term years	7	7	8	8
	Lessor's and lessee's interest rate	9%	11%	10%	12%
	Residual value:
	Estimated fair value	$0	$50,000	$8,000	$50,000
	Guaranteed by lessee	$0	$0	$8,000	$60,000

Answer 1

• All working forms part of the answer
• All the Requirement of ‘A’: The Lessors----

Working		Situation 1	Situation 2	Situation 3	Situation 4
A	Annual Lease payments	$                           100,000.00	$             100,000.00	$                   100,000.00	$                     100,000.00
B	Term	7	7	8	8
C	Guaranteed by lessee	$                                            -	$                              -	$                       8,000.00	$                        60,000.00
D = (A x B) + C	Minimum Lease Payments	$                           700,000.00	$             700,000.00	$                   808,000.00	$                     860,000.00
E	Unguaranteed		$               50,000.00	$                                    -	$                                       -
F = D + E	Gross Investments	$                           700,000.00	$             700,000.00	$                   808,000.00	$                     860,000.00
G	Rate of Interest	9%	11%	10%	12%
H = $1 Annuity for 'B' period and 'G' Interest	Annuity Value of $1 as per table	5.48592	5.23054	5.86842	5.56376
I = A x H	Present Value of Annual Lease payment	$                           548,592.00	$             523,054.00	$                   586,842.00	$                     556,376.00
J = $1 PV factor of 'G' interest for 'B' no. of period	Present Value factor $1	0	0.48166	0.46651	0.40388
K = (C+E) x J	Present Value of Guaranteed & Unguaranteed by lessee	$                                            -	$               24,083.00	$                       3,732.08	$                        24,232.80
L = I + K	Net Investment in the lease	$                           548,592.00	$             547,137.00	$                   590,574.08	$                     580,608.80

• All the Requirements of ‘B’: The Lessee’s------

Working		Situation 1	Situation 2	Situation 3	Situation 4
A	Annual Lease payments	$                           100,000.00	$             100,000.00	$                   100,000.00	$                     100,000.00
B	Term	7	7	8	8
C	Guaranteed by lessee	$                                            -	$                              -	$                       8,000.00	$                        60,000.00
D = (A x B) + C	Lease payments	$                           700,000.00	$             700,000.00	$                   808,000.00	$                     860,000.00
E	Rate of Interest	9%	11%	10%	12%
F = $1 Annuity for 'B' period and 'E' Interest	Annuity Value of $1 as per table	5.48592	5.23054	5.86842	5.56376
G = A x F	Present Value of Annual Lease payment	$                           548,592.00	$             523,054.00	$                   586,842.00	$                     556,376.00
H = $1 PV factor of 'E' interest for 'B' no. of period	Present Value factor $1	0	0.48166	0	0.40388
I = C x H	Present Value of Guaranteed by lessee	$                                            -	$                              -	$                                    -	$                        24,232.80
J = G + I	Right to Use Asset	$                           548,592.00	$             523,054.00	$                   586,842.00	$                     580,608.80
K = J	Lease Liability	$                           548,592.00	$             523,054.00	$                   586,842.00	$                     580,608.80