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 2 4 Lease term (years) Lessor's rate of return Fair value of lease asset Lessor's cost of lease asset Residual value 4 10% 7 8 11% 9% 12% $ 61,000 $361,000 $ 86,000 $476,000 $ 61,000 $361,000 $ 56,000 $476,000 Estimated fair value Guaranteed fair value 0 61,000 18,000 $30,000 0 $18,000 35,000 0 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 Liabili PV of Lease PV of Residual Lease Payments Payments Value Guarantee Situation 1 Situation 2 Situation3 Situation 4

Explanation / Answer

Situation 1 2 3 4 Lease term (years) 4 7 5 8 Lessor's rate of return 10% 11% 9% 12% Fair value of lease asset $61,000 $361,000 $86,000 $476,000 Lessor's cost of lease asset $61,000 $361,000 $56,000 $476,000 Residual value: Estimated fair value 0 $61,000 $18,000 $30,000 Guaranteed fair value 0 0 $18,000 $35,000 Lease Payments Residual Value Guarantee PV of Lease Payments PV of Residual Value Guarantee Right-of-use Asset/Lease Liability Situation 1 $             17,494 $                  -   $                        61,000 $                     -   $         61,000 Situation 2 $             69,018 $                  -   $                      361,000 $                     -   $       361,000 Situation 3 $             17,525 $           18,000 $                        74,301 $              11,699 $         86,000 Situation 4 $             83,013 $           35,000 $                      461,864 $              14,136 $       476,000 Lease Payments Residual Value Guarantee PV of Lease Payments PV of Residual Value Guarantee Right-of-use Asset/Lease Liability Situation 1 61000/3.48685 $                  -   $                        61,000 $                     -   $         61,000 Situation 2 361000/5.23054 $                  -   $                      361,000 $                     -   $       361,000 Situation 3 74301/4.23972 $           18,000 86000-11699 18000*0.64993 $         86,000 Situation 4 461864/5.56376 $           35,000 476000-14136 35000*0.40388 $       476,000 PVAD used PV of $1 used

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