Each of the three independent situations below describes a finance lease in whic

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.)

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 1 2 3 Lease term (years) 8 15 3 Lessor's rate of return 11% 9% 12% Lessee's incremental borrowing rate 12% 10% 11% Fair value of lease asset $760,000 $1,060,000 $265,000

Explanation / Answer

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

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

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