Question

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

	Situation
		1			2			3			4
Lease term (years)		5			8			6			9
Lessor's rate of return		10	%		11	%		9	%		12	%
Fair value of lease asset	$	53,000		$	353,000		$	78,000		$	468,000
Lessor's cost of lease asset	$	53,000		$	353,000		$	48,000		$	468,000
Residual value:
Estimated fair value		0		$	53,000		$	10,000		$	48,000
Guaranteed fair value		0			0		$	10,000		$	53,000

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 above situations. (Round your PV factor answers to 5 decimal places and other answer to nearest whole dollar.)

	Lease Payments Residual Value Guarantee PV of Lease Payments PV of Residual Value Guarantee Right-of-use Asset/Lease Liability Situation 1 $12,710 $0 $53,000 $0 $53,000 Situation 2 $0 Situation 3 $0 Situation 4 $0

Answer 1

Working Notes:-

	Situation 2
Year	Rate 11%	Amount to be recovered (Fair Value)			353,000.00
1	1
2	0.90090	Annual lease			61,797.60
3	0.81162	(353,000/5.71220)
4	0.73119
5	0.65873
6	0.59345
7	0.53464
8	0.48166
	5.71220
	Situation 3
Year	Rate 9%
1	1	Amount to be recovered(Fair Value)			78,000
2	0.91743	Less: PV of residual value			16,771
3	0.84168	(10,000/0.59626)
4	0.77218	Amount to be recovered through lease			61,229
5	0.70843
6	0.64993	Annual lease payment			12,522.12
	4.88965	(61,229/4.88965)
	Situation 4
Year	Rate 12%
1	1.00000	Amount to be recovered(Fair Value)			468,000.00
2	0.89286	Less: PV of residual value			146,973.17
3	0.79719	(53,000/0.36061)
4	0.71178	Amount to be recovered through lease			321,026.83
5	0.63552
6	0.56743	Annual lease payment			53,794.61
7	0.50663
8	0.45235
9	0.40388
	5.96764