Question

Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the end 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	15	5
Lessor's rate of return	10%	8%	11%
Lessee's incremental borrowing rate	11%	9%	10%
Fair value of lease asset	$780,000	$1,070,000	$275,000

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 answers to nearest whole dollar.)

Answer 1

situation 1
A-annual lease payment =PMT	PV*I / 1-(1+r)^-n	760000*11% / 1-(1.11)^-8	83600/.566074	147684
B- right of use asset	annual lease payment*PVAF at 11% for 8 years	147684*5.14612	760000
PVAF at 11% for 8 years	1-(1+r)^-n/r	.566074/.11	5.146127
situation 2
A-annual lease payment =PMT	PV*I / 1-(1+r)^-n	1060000*9% / 1-(1.09)^-15	95400/.72546	131502.6	131503
B- right of use asset	annual lease payment*PVAF at 11% for 8 years	131502*8.06068	1060000
PVAF at 9% for 15 years	1-(1+r)^-n/r	.72546/.09	8.060667
situation 3
A-annual lease payment =PMT	PV*I / 1-(1+r)^-n	265000*12% / 1-(1.12)^-3	31800/.288219	110332.8
B- right of use asset	annual lease payment*PVAF at 11% for 8 years	110332.8*2.401831	265000.6	265000
PVAF at 12% for 3years	1-(1+r)^-n/r	.72546/.09	2.401831