rk Chapter 15 Saved Help Save&Exit; Check my wo Each of the three independent si

ID: 2514498 • Letter: R

Question

rk Chapter 15 Saved Help Save&Exit; Check my wo Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the and PVAD of $) (Use appropriate factor(s) from the tables provided.) Situation Lease term (years) Lessor's rate of return (known by lessee) Lessee's incremental borrowing rate Fair value of lease asset 10 20 8% 9% 11% 18% $770,eee $1,150,000 $355,e00 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.) Situation 3 ?Prev 3 of 4111 Next >

Explanation / Answer

Determination of 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 the given situations:

Lease Payments

Right-of-use Asset/Lease Payable

situation1

$125,305

$770,000

Situation 2

$117,132

$1,150,000

Situation 3

$114,428

$355,000

Workings –

= fair value of leased asset/(present value of an ordinary annuity of $1, i =10%, n = 10)

Present value of ordinary annuity of $1, 10%, 10 = 6.145

Fair value of leased asset = $770,000

Annual lease payments = $770,000/6.145 = $125,305 (rounded to nearest dollar)

fair value of leased asset/(present value of an ordinary annuity of $1, i =8%, n = 20)

Present value of ordinary annuity of $1, 8%, 20 = 9.818

Fair value of leased asset = $1,150,000

Annual lease payments = 1,150,000/9.818 = $117,132 (rounded to nearest dollar)

fair value of leased asset/(present value of an ordinary annuity of $1, i =11%, n = 4)

Present value of ordinary annuity of $1, 11%, 4 = 3.1024

Fair value of leased asset = $355,000

Annual lease payments = $355,000/3.1024 = $114,428 (rounded to nearest dollar)

Present value of ordinary annuity of $1, 10%, 4 = 3.1699

= $114,428 x 3.1699 = $362,724 (rounded to nearest dollar)

Since, the lease liability exceeds the asset’s fair value at 10%, the lessee should instead capitalize $355,000, the asset’s fair value.