Each of the four independent situations below describes a sales-type lease in wh

Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $10,000 are payable at the beginning of each year. Each is a finance lease for the lessee. Determine the following amounts at the beginning of the lease.

The Lessor

1. Lease payments

2. Gross investment in the lease

3. Net investment in the lease

The Lessee

4. Lease payments

5. Right of use asset

6. Lease payable

Situation Lease term (years) Asset's useful life (years) Lessor's implicit rate (known by lessee) Residual value: 4 4 4 4 4 11% 11% 11% 11% 4,000 $2,000 0 Guaranteed by lessee Unguaranteed Purchase option: After (years) Exercise price Reasonably certain? 0 $2,000 $4,000 none3 4 n/a $7,000 $1,000 $3,000 n/a no no yes

Explanation / Answer

The LESSOR

* Present value factor @ 11% for 4 years = 3.449

The LESSEE

* Present value factor @ 11% for 4 years = 3.449

Situation 1 Situation 2 Situation 3 Situation 4 Lease payments ( Annual lease Payments + Guranteed residual value by Lessee) 10000 14000 12000 10000 Gross Investments in Lease (Lease payments + Un-guaranteed residual value) 10000 14000 14000 14000 Net Investments in Lesase ( Gross Investments * Present value factor) 34490 48286 48286 48286

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