The Deluxe Corporation has just signed a 132-month lease on an asset with a 16-y

Question

The Deluxe Corporation has just signed a 132-month lease on an asset with a 16-year life. The minimum lease payments are $2,100 per month ($25,200 per year) and are to be discounted back to the present at a 10 percent annual discount rate. The estimated fair value of the property is $205,000. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease.

a. Calculate the lease period as a percentage to the estimated life of the leased property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

b. Calculate the present value of lease payments as a percentage to the fair value of the property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

c. Should the lease be recorded as a capital lease or an operating lease? (Use criteria 3 and 4 for a capital lease.)
  

Explanation / Answer

The estimated life of leased asset is 16 years i.e 16*12 = 192 months

Lease period = 132 months

the lease period as a percentage to the estimated life of the leased property = (132/192)*100 = 68.75%

2) Calculation of pv value of lease payments :

given lease period = 132 months i.e 11 years

Annual lease payments = 25200

Pv of lease payments = 25200* (PVF @ 10% for 11 years) = 25200*6.144567

=$154843.1

the present value of lease payments as a percentage to the fair value of the property = (154843.1/205000)*100

=75.53%

C)It is an operating lease because the period of lease doesnot exceeds 75% of useful life of asset and present value of minimum lease payments doesnot exceed 90% of fairvalue of asset leased.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.