Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $165,000 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
	1	2	3	4
Lease term (years)	6	6	7	7
Lessor's and lessee's interest rate	10%	12%	11%	11%
Residual value:
Estimated fair value	0	$63,000	$9,300	$63,000
Guaranteed by lessee	0	0	$9,300	$73,000

Determine the following amounts at the beginning of the lease: (Round your intermediate and final answer to the nearest whole dollar amount.

Situation 1 2 3 4 A The lessor’s: 1. Total lease payments $990,000 $990,000 $1,155,000 $1,155,000 2. Gross investment in the lease 990,000 1,053,000 1,164,300 3. Net investment in the lease 790,480 791,706 B The lessee’s: 4. Total lease payments 990,000 990,000 1,155,000 5. Right-of-use asset 790,480 759,788 6. Lease liability 790,480 759,788

Answer 1

	Situations
	1	2	3	4
The lessor's:	($)	($)	($)	($)
1. Total lease payments	9,90,000	9,90,000	11,55,000	11,55,000
2.Gross investment in the lease	9,90,000	10,53,000	11,64,300	12,18,000
3.Net investment in the lease	7,90,480	7,91,706	8,68,011	8,96,721
The lessee's:
4.Total lease payments	9,90,000	9,90,000	11,55,000	11,55,000
5. Right-of-use asset	7,90,480	7,59,788	8,63,039	8,63,039
6. Lease liability	7,90,480	7,59,788	8,63,039	8,63,039

Put the formulae:

Gross investment = Lease payments + guarranted value+ (fair value-guaranteed value)

Net investment = Present value of gross investment

Right of use asset = Present value of Lease payments