Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $10,000 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.

The lessor’s:

Lease payments

Gross investment in the lease

Net investment in the lease

The lessee’s:

Lease payments

Right-of-use asset

Lease liability

	Situation
	1	2	3	4
Lease term (years)	4	4	4	4
Asset’s useful life (years)	4	5	5	7
Lessor’s implicit rate (known by lessee)	11%	11%	11%	11%
Residual value:
Guaranteed by lessee	0	$4,000	$2,000	0
Unguaranteed	0	0	$2,000	$4,000
Purchase option:
After (years)	none	3	4	3
Exercise price	n/a	$7,000	$1,000	$3,000
Reasonably certain?	n/a	no	no	yes

Answer 1

Siuation 1:	Formula	Amount
Lessor's
1. Lease payments	=100000*4	400,000.00
2. Gross investment in the lease	=100000*4	400,000.00
3. Net investment in the lease	=100000*PVAF(11%,4 years) = 110000*3.4437	378,807.00
Lessee's
1. Lease Payments	=100000*4	400,000.00
2. Right-of-use assets	=100000*PVAF(11%,4 years) = 110000*3.4437	378,807.00
3. Lease Liability	=100000*PVAF(11%,4 years) = 110000*3.4437	378,807.00

Siuation 2:	Formula	Amount
Lessor's
1. Lease payments	=(100000*4)+4000	404,000.00
2. Gross investment in the lease	=(100000*4)+4000	404,000.00
3. Net investment in the lease	=[100000*PVAF(11%,4 years)] + [4000*PVF(11%,4years)] = (110000*3.4437)+(4000*0.6587)	381,441.80
Lessee's
1. Lease Payments	=(100000*4)+4000	404,000.00
2. Right-of-use assets	=[100000*PVAF(11%,4 years)] + [4000*PVF(11%,4years)] = (110000*3.4437)+(4000*0.6587)	381,441.80
3. Lease Liability	=[100000*PVAF(11%,4 years)] + [4000*PVF(11%,4years)] = (110000*3.4437)+(4000*0.6587)	381,441.80

Siuation 3:	Formula	Amount
Lessor's
1. Lease payments	=(100000*4)+2000	402,000.00
2. Gross investment in the lease	=(100000*4)+2000+2000	404,000.00
3. Net investment in the lease	=[100000*PVAF(11%,4 years)] + [(2000+2000)*PVF(11%,4years)] = (110000*3.4437)+(4000*0.6587)	381,441.80
Lessee's
1. Lease Payments	=(100000*3)+2000	402,000.00
2. Right-of-use assets	=[100000*PVAF(11%,4 years)] + [2000*PVF(11%,4years)] = (110000*3.4437)+(2000*0.6587)	380,124.40
3. Lease Liability	=[100000*PVAF(11%,4 years)] + [2000*PVF(11%,4years)] = (110000*3.4437)+(2000*0.6587)	380,124.40

Siuation 4:	Formula	Amount
Lessor's
1. Lease payments	=(100000*3)+3000	303,000.00
2. Gross investment in the lease	=(100000*3)+3000	303,000.00
3. Net investment in the lease	=[100000*PVAF(11%,3 years)] + [(3000)*PVF(11%,3years)] = (110000*2.7125)+(3000*0.7312)	273,445.91
Lessee's
1. Lease Payments	=(100000*3)+3000	303,000.00
2. Right-of-use assets	=[100000*PVAF(11%,3 years)] + [(3000)*PVF(11%,3years)] = (110000*2.7125)+(3000*0.7312)	273,445.91
3. Lease Liability	=[100000*PVAF(11%,3 years)] + [(3000)*PVF(11%,3years)] = (110000*2.7125)+(3000*0.7312)	273,445.91

For situation 4, since the repurchase option will be excercises at end of year 3, the term of lease is 3 years and residual value will be the option's excercise price.