Question

For each of the three independent situations below determine the amount of the annual lease payments. Each describes a finance lease in which annual lease payments are payable at the beginning of each year. Each lease agreement contains an option that permits the lessee to acquire the leased asset at an option price that is sufficiently lower than the expected fair value that the exercise of the option appears reasonably certain (EV of $1. PV of $1, EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) ktoped Situation Book $32,000 $ 61,000 Lease term (years) Lessor's rate of return Fair value of leased asset Lessor's cost of leased asset Purchase option: Exercise price Exercisable at end of year: Reasonably certain? 115 $431,000 $431,000 $196,000 $ 156,000 ent Print $ 21,000 $61,000 $33,000 erences Determine the annual lease payments for each situation (Round your intermediate and final answer to the nearest whole dollar amount.): Annual lease payments Situation 1 Situation 2 Situation 3

Answer 1

	Annual lease payments
Situation 1	$19403
Situation 2	$113487
Situation 3	$87735

Situation 1
Amount to be recovered (fair value)	82000
Less: Present value of the BPO price ($21,000 × 0.68301)	(14343)
Amount to be recovered through periodic lease payments	67657
Lease payments at the Beginning of each of the next 4 years:   ($67657 ÷ 3.48685)	$19403
present value of $1: n = 4 i = 10% is 0.68301
present value of an annuity due of $1: n = 4 i = 10% is 3.48685

Situation 2
Amount to be recovered (fair value)	431000
Less: Present value of the BPO price ($61,000 × 0.65873)	(40183)
Amount to be recovered through periodic lease payments	390817
Lease payments at the Beginning of each of the next 4 years:   ($390817÷ 3.44371)	$113487
present value of $1: n = 4 i = 11% is 0.65873
present value of an annuity due of $1: n = 4 i = 11% is 3.44371

Situation 1
Amount to be recovered (fair value)	196000
Less: Present value of the BPO price ($33,000 × 0.84168)	(27775)
Amount to be recovered through periodic lease payments	168225
Lease payments at the Beginning of each of the next 2 years:   ($168225 ÷ 1.91743 )	$87735
present value of $1: n = 2 i = 9% is 0.84168
present value of an annuity due of $1: n = 2 i = 9% is 1.91743