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.) 1 2 5 Lease term (years) Lessor's rate of return Fair value of lease asset Lessor's cost of lease asset Residual value: Estimated fair value Guaranteed fair value Situation 3 4 86 11% 9% 12% $359,000 $84,000 $474,000 $359,000 $54,000 $474,000 $59,000 $59,000 0 0 $ 59,000 0 $16,000 $16,000 $ 32,000 $ 37,000 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.) Pi Lease Payments Residual Value Guarantee PV of Lease Payments PV of Residual Value Guarantee Right-of-use Asset/Lease Liability $ 59,000 $ $ 14,149 $ $ $ 0 0 59,000 $ $ 0 0 Situation 1 Situation 2 Situation 3 Situation 4

Answer 1

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	Lease payments	Residual value guarantee	PV of lease payments	PV of residual value Guarantee	Right-of-use Asset/lease liability
Situation 1	14149	0	59000	0	59000
Situation 2	58366	0	333398	0	333398
Situation 3	15228	0	74460	0	74460
Situation 4	77192	5000	460657	1803	462460

Situation 1

Lease payments = 59000/4.16987 = 14149

Present value of annuity due factor for n = 5 and i=10% is 4.16987

Situation 2

Lease payments = (fair value – present value of residual value) / Present value of annuity due factor

PV of residual value = 59000*0.43393 = $25602

Present value factor for n = 8 and i = 11% is 0.43393

Present value of annuity due factor for n = 8 and i=11% is 5.71220

Lease payments = (359000-25602)/ 5.71220 = $58366

Present value of lease payments = (fair value – present value of residual value) = 359000-25602 = 333398

Situation 3

Lease payments = (fair value – present value of residual value) / Present value of annuity due factor

PV of residual value = 16000*0.59627 = $9540

Present value factor for n = 6 and i = 9% is 0.59627

Present value of annuity due factor for n = 6 and i=9% is 4.88965

Lease payments = (84000-9540)/ 4.88965 = $15228

Present value of lease payments = (fair value – present value of residual value) = 84000-9540 = 74460

Situation 4

Lease payments = (fair value – present value of guaranteed residual value) / Present value of annuity due factor

PV of guaranteed residual value = 37000*0.36061 = $13343

Present value factor for n = 9 and i = 12% is 0.36061

Present value of annuity due factor for n = 9 and i=12% is 5.96764

Lease payments = (474000-13343)/ 5.96764 = $77192

Present value of lease payments = (fair value – present value of residual value) = 474000-13343= 460657

PV of residual value Guarantee = 5000*0.36061 = 1803