Question

For each of the three independent situations below determine the amount of the annual lease payments. Each describes a capital lease in which annual lease payments are payable at the beginning of each year. Each lease agreement contains an option that permits the lessee to acquire the leased asset at an option price that is sufficiently lower than the expected fair value that the exercise of the option appears reasonably certain. (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)		4			12			3
Lessor’s rate of return		11	%		12	%		10	%
Fair value of leased asset	$	80,000		$	430,000		$	195,000
Lessor’s cost of leased asset	$	60,000		$	430,000		$	155,000
Bargain purchase option:
Option price	$	20,000		$	60,000		$	32,000
Exercisable at end of year:		4			4			2

Determine the annual lease payments for each situation:

Answer 1

Answer 1.
Amount to be recovered (fair value)	80,000.00
Less: PV of the BPO Price - $20,000 X 0.65873	(13,174.60)
Amount to be recovered through periodic lease payments	66,825.40
Lease Payments at the Beginning of each of the next 4 years - $66,825.40 / 3.44371)	19,405.06
Answer 2.
Amount to be recovered (fair value)	430,000.00
Less: PV of the BPO Price - $60,000 X 0.63552	(38,131.20)
Amount to be recovered through periodic lease payments	391,868.80
Lease Payments at the Beginning of each of the next 4 years - $391,868.80 / 3.40183)	115,193.53
Answer 3.
Amount to be recovered (fair value)	195,000.00
Less: PV of the BPO Price - $32,000 X 0.68301	(21,856.32)
Amount to be recovered through periodic lease payments	173,143.68
Lease Payments at the Beginning of each of the next 4 years - $173,143.68 / 3.48685)	49,656.19