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
		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	$	60,000		$	360,000		$	85,000		$	475,000
Lessor's cost of lease asset	$	60,000		$	360,000		$	55,000		$	475,000
Residual value:
Estimated fair value		0		$	60,000		$	17,000		$	29,000
Guaranteed fair value		0			0		$	17,000		$	34,000

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 each of the above situations. (Round your answers to the nearest whole dollar amount.)

Answer 1

Situation (1)
(a)Lessor's calculation of Periodic Lease Payment:
The lessor calculation of the periodic lease payment include the amount
to be recovered at fair value and the lease payment at the beginning of
each of the next 4 years as calculated below,
Particulars	Amount(S)
Amount to be recorved(fair value)	60,000
Lease payment at the beginning of each of the next four years(60000/3.48685)	17,208
Note : Present value of an annuity due of $1: n=4, i=10%
(b)Lessee's calculation of the Right of use Assets and Lease liability
the right of use assets is calculated as the product of payment per
installemt and the annuity factor discounted at 10% for 20 period as shown below,
Right to useassets = 17,207.51*3.48685
Right to useassets = $60,000
Situation (2)
(a)Lessor's calculation of Periodic Lease Payment:
Particulars	Amount(S)
Amount to be recorved(fair value)	360,000
Less: present value of residual value (60,000*0.48166)	(28,900)
Amount to be recorved through periodic lease payments	331,100
Lease payment at the beginning of each of the next seven years(331,100.40/5.23054)	63,301
Note : Present value of an annuity due of $1: n=7, i=11%
(b)Lessee's calculation of the Right of use Assets and Lease liability
=63301.38*5.23054
$                                                331,100
Situation (3)
(a)Lessor's calculation of Periodic Lease Payment:
Particulars	Amount(S)
Amount to be recorved(fair value)	85,000
Less: present value of residual value (17,000*.64993)	(11,049)
Amount to be recorved through periodic lease payments	73,951
Lease payment at the beginning of each of the next 5 years(73951.19/4.23972)	17,442
Note : Present value of an annuity due of $1: n=5, i=9%
(b)Lessee's calculation of the Right of use Assets and Lease liability
=17442.47*4.23972
73,951
Situation (4)
(a)Lessor's calculation of Periodic Lease Payment:
Particulars	Amount(S)
Amount to be recorved(fair value)	475,000
Less: present value of the excess guaranteed residual value(34000-29000)*.40388	(2,019)
Less: present value of residual value (29000*.0.40388)	(11,713)
Amount to be recorved through periodic lease payments	461,268
Lease payment at the beginning of each of the next 8 years(461,268.08/5.56376)	82,906
Note : Present value of an annuity due of $1: n=8, i=12%
(b)Lessee's calculation of the Right of use Assets and Lease liability
Particulars	Amount($)
Present value of periodic lease payment(82,905.82*5.56376)	461,268
Add:Present value of an estimated cash payment under a residual value guarantee(5000*0.40388)	2,019
Present valueof expected total lease payment	463,287