Question

Assume that Tropical has reasonable assurance that Bayview will make the remaining lease payments. All costs of operating the leased equipment are borne by Bayview. Assume that both companies have a December 31st year end. Answer the following relative to the above information. Criteria Assessment 1. Does the lessee have the option to purchase the asset at a price that is expected to be substantially lower than the fair value at the date the option becomes exercisable? 2. Is the lease term for the major part of the economic life of the asset even if title is not transferred? 3. $ x PVIF Calculate the present value of the lease (use four decimal places for your calculations and round your answer to the nearest dollar). + $2,000 x PVIF = $ 4. At the inception of the lease, does the present value of the minimum lease payments amounts to at least substantially all (greater than 90%) of the fair value of the leased asset? From the perspective of the lessor, what kind of lease is the above? Leave us a Message 1

Answer 1

Criteria 1: Yes

Explanation:

Residual value at the end of lease term = $20,000

Purchase option at the end of lease term = $2,000

Therefore, the lessee has the option to purchase the asset at a price that is expexted to be substanitally lower i.e. $18,000 ($20,000 - $2,000) lower than the fair value at the date the option becomes exercisable.

Criteria 2: Yes

Explanation:

Economic life of the asset = 10 years

Lease term = 8 years

Therefore, lease term for the major part i.e. 80% (8 years / 10 years) of the economic life of the asset even if the asset is not transferred.

Criteria 3:

Present Value of lease = (Annual lease payments * Present Value ordinary annuity factor) + (Purchase option * Present Value factor)

= ($16,881 * 5.8684) + ($2,000 * 0.4665)

= $99,057.71 + $933

= $99,990.71 or $99,991

Criteria 4: Yes

Explanation:

Fair value of leased asset = $100,000

The present value of minimum lease payments amounts to all least substantially all of the fair value of the asset.

From the prospective of the lessor, what kind of lease is the above? Financial Lease