Use the following to answer questions 19-24 Annuity tables on page 21-30.) in th

Question

Use the following to answer questions 19-24 Annuity tables on page 21-30.) in the Textbook On January 1, 2018, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6,000,000; however, the book value to Holt is $4,950,000. I value. Yancey similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. ancey's incremental borrowing rate is 1 196 per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (O The yearly rental payment includes $15,00 of executory costs related to taxes on the property 19. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.) A) $272,703 B) $872,703 C) $887,703 D) $902,703 20. What is the amount of the total annual lease payment? A) $272,703 B) $872,703 C) $887,703 D) $902,703 21. From the lessee's viewpoint, what type of lease exists in this case? A) Sales-type lease B) Sale-leaseback C) Capital lease D) Operating lease 22. From the lessor's viewpoint, what type of lease is involved? A) Sales-type lease B) Sale-leaseback C) Direct-financing lease D) Operating lease

Explanation / Answer

Answer:-

19. Let Minimum Lease payment p.a. = X

Fair value of Building = $ 6,000,000

Required Rate of Return = 10%

Lease Rental is payable at the begining of every year

So At Interest rate= 10%, the Present value of the lease payment should be equal to the Fair Value of the Building, as the Building will be transferred to Lessee at the end of the lease term.

PV of Lease Payment = Fair Value of the Building

X + X * PVAF (10%,9) = $ 6,000,000

X = 6000000/ 6.7590

= $ 887,703

There fore Anser is = (C) $ 887,703

Ans:20

Amount of Total Annual Lease Payment = 887,703 + 15,000

= (D) 902,703

Ans:21

Since the Ownership of the Building will be transferred to Lessee at the end of the Lease term, it will be considered as Finance Lease or Capital Lease from Lessee's point of view.

Ans- (C) Capital Lease

Ans-22

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Since in this case, Building is given on the lease for the entire life of the building, It will be considered as Finance Lease from Lessor's point of view.

Ans- (C) Direct Finance Lease

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