Each of the four independent situations below describes a finance lease in which

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 Lease term (years) Lessor's rate of return Fair value of lease asset Lessor's cost of lease asset Residual value: 10% 11% 9 % 12% $56,000 $356,000 $81,000 471,000 $56,000 $356,000 $51,000 $471,000 Estimated fair valu Guaranteed fair value 0 56,000 $13,000 0 $13,000 51,000 56,000 Required a. & b. Determine the amount of the annual lease payments as calculated by the lessor and the amount the lessee would record as a right-of-use asset and a lease liability, for above situations. (Round your PV factor answers to 5 decimal places and other answer to nearest whole dollar.) Residual Value Guarantee Right-of-use Asset/Lease Liabilit PV of Lease PV of Residual Lease Payments PaymentsValue Guarantee Situation 1$ Situation 2 Situation 3 Situation 4 16,060 $ 0 0 0 0

Explanation / Answer

The problem requires the calculation of Annual Lease Payment.

Please note that it has been given that, such payments are payable at beginning of the period. Hence, it refers to the annuity due. Rent is a classic example of annuity due.

Calculation of Present Value for Annuity Due:

Since payment is made at the beginning of the period, the formula of annuity due present value discounts one period ahead.

Fair Value will be the amount to be recovered through payment of lease payments.

Situation 1:

Amount to be Recovered or Fair Value = $50,000

Present Value of Annuity Due of $1 with relation to n=4, i=10% = 3.48685

Annual Lease Payments starting with beginning of the Year = 50,000/ 3.48685 = $14,339.590 = $14,340

Situation 2:

Amount to be Recovered or Fair Value = $350,000

Present Value of Annuity Due of $1 with relation to n=7, i=11% = 5.23053

Annual Lease Payments starting with beginning of the Year = 350,000/ 5.23053 = $66,914.825 = $66,915

Situation 3:

Amount to be Recovered or Fair Value = $75,000

Present Value of Annuity Due of $1 with relation to n=5, i=9% = 4.23971

Annual Lease Payments starting with beginning of the Year = 75,000/ 4.23971 = $17,689.889 = $17,690

Situation 4:

Amount to be Recovered or Fair Value = $465,000

Present Value of Annuity Due of $1 with relation to n=8, i=12% = 5.11140

Annual Lease Payments starting with beginning of the Year = 465,000/ 5.11140 = $90,973.118 = $90,973

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