Question

Exercise 15-12 Lessor calculation of annual lease payments; lessee calculation of asset and liability [LO15-5] Each of the three independent situations below describes a capital 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 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 leased 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 leased asset/liability, for above situations.

Answer 1

Solution :-

Situation 1:

(a) Answer :-

Lease payments = Fair Value × PV Factor

= $720,000 ÷ 5.889 (refer note 1)

Lease payment =$122,262 (rounded)

Note 1 - present value of ordinary annuity of $1: n = 10, i = 11% (refer to present value interest factor of an ordinary annuity table of $1)

(b). Answer -

Leased asset / Leased liability = Lease Payments × Present value interest factor

= $122,262 × 5.889 (refer to note 1 mentioned above ) = $720,000 (rounded)

Situation 2:-

(a). Answer -

Lease payments = Fair Value ÷ present value interest factor

= $1,100,000 ÷ 9.129 (refer to note 2)

Lease payments = $120,495 (rounded )

Note 2:- Refer to present value interest factor of an ordinary annuity of $1 table where n= 20 years and i = 9%

(b). Answer -

Leased asset / Lease liability = Lease Payments × Present value interest factor

= $120,495 × 9.129 ( refer to note 2 mentioned above)

= $1,100,000 (rounded)

Situation 3 :-

(a) Answer :-

Lease payments = Fair Value ÷ present value interest factor

= $305,000 ÷ 3.605 (refer to note 3)

=$84,605 (rounded)

Note 3:- As per the present value interest factor table where n= 5years and i = 12%

(b). Answer -

Lease Asset / Lease liability = Lease Payments × Present value interest factor

= $84,605 × 3.605 (refer to note 3)

= $305,000 (rounded)