Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $16,000 are payable at the beginning of each year. Each is a finance lease for the lessee. (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 Uw 5 118 11% Lease term (years) Asset's useful life (years) Lessor's implicit rate (known by lessee) Residual value: Guaranteed by lessee Unguaranteed Purchase option: After (years) Exercise price Reasonably certain? 0 0 $6,400 0 $3,200 $3,200 0 $6,400 3 none n/a n/a $8,200 no $2,200 no $4,200 yes Determine the following amounts at the beginning of the lease: (Round your final answers to nearest whole dollar.) Situation 2 3 A. The lessor's: 1. Total lease payments $ 64,000 64,000 64,000 64,000 2. Gross investment in the lease 6 4,000 3. Net investment in the lease CDI B. The lessee's: 4. Total lease payments 5. Right-of-use asset 6. Lease liability

Answer 1

			Situations
			1	2	3	4
A	The Lessor’s:
	1	Lease payments	64000	70400	67200	52200
	2	Gross investment in the lease	64000	70400	70400	58600
	3	Net investment in the lease	55099	59315	59315	51151
B	The lessee’s:
	4	Lease payments	64000	70400	67200	52200
	5	Right-of-use asset	55099	59315	57207	46471
	6	Lease payable	55099	59315	57207	46471

Lease payments

Situation 1 = 16000*4= 64000

Situation 2 = (16000*4)+6400 = 70400

Situation 3 = (16000*4)+3200 =67200

Situation 4 = (16000*3)+4200 = 52200

Gross investment in the lease

Situation 1 = 64000

Situation 2 = 70400

Situation 3 = 67200+3200 = 70400

Situation 4 = 52200+6400 = 37000

Net investment in the lease

Situation 1 = 16000*3.44371= 55099

Present value of annuity due of $1 of n= 4, i = 11% = 3.44371

Situation 2 = (16000*3.44371)+(6400*0.65873) =59315

Present value of $1 of n= 4, i = 11% = 0.65873

Situation 3 = (16000*3.44371)+(6400*0.65873) =59315

Situation 4 = (16000*2.71252)+(10600*0.73119) = 51151

Present value of annuity due of $1 of n= 3, i = 11% = 2.71252

Present value of $1 of n= 3, i = 11% = 0.73119

Right-of-use asset

Situation 1 = 55099

Situation 2 = 59315

Situation 3 = (16000*3.44371)+(3200*0.65873) =57207

Situation 4 = (16000*2.71252)+(4200*0.73119) = 46471

Answer 2

	The lessors	1	2	3	4
	total lease payments	64,000	64,000	64,000	52,200
	gross investment in the lease	64,000	70,400	70,400	52,200
	net investment in the lease	55,099	59,315	59,315	46,471
	The lessee
	total lease payments	64,000	64,000	64,000	48,000
	right-of use asset	55,099	55,099	55,099	46,471
	lease liability	55,099	55,099	55,099	46,471
lessor	total lease payments
	1	16000*4	64,000.00
	2	16000*4	64,000.00
	3	16000*4	64,000.00
	4	16000*3+4200	52,200.00
	gross investments
	gross investment in the lease
	1	16000*4	64,000.00
	2	16000*4+(6400)	70,400.00
	3	16000*4+(3200+3200)	70,400.00
	4	16000*3+(4200)	52,200.00
	net investment in the lease
	1	16000*3.44371	55,099.36	pvad=3.44371	pv= 0.65873
	2	(16000*3.44371)+(6400*.65873)	59,315.23	pvad=3.44371	pv= 0.65873
	3	(16000*3.44371)+((3200+3200)*.65873)	59,315.23	pvad=3.44371	pv= 0.65873
	4	(16000*2.71252)+(4200*.73119)	46,471.32	pvad=2.71252	pv=.73119
lessee	total lease payments
	1	16000*4	64,000.00
	2	16000*4	64,000.00
	3	16000*4	64,000.00
	4	16000*3	48,000.00
	right-of use asset			pvad=3.44371	pv= 0.65873
	1	16000*3.44371	55,099.36	pvad=3.44371	pv= 0.65873
	2	16000*3.44371	55,099.36	pvad=3.44371	pv= 0.65873
	3	16000*3.44371	55,099.36	pvad=3.44371	pv= 0.65873
	4	(16000*2.71252)+(4200*.73119)	46,471.32	pvad=2.71252	pv=.73119
	lease liability
	1	16000*3.44371	55,099.36	pvad=3.44371	pv= 0.65873
	2	16000*3.44371	55,099.36	pvad=3.44371	pv= 0.65873
	3	16000*3.44371	55,099.36	pvad=3.44371	pv= 0.65873
	4	(16000*2.71252)+(4200*.73119)	46,471.32	pvad=2.71252	pv=.73119