Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $130,000 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.) 4 1 7 8% Situation 2 3 7 8 10% 9% 11% Lease term (years) Lessor's and lessee's interest rate Residual value: Estimated fair value Guaranteed by lessee $56,000 0 $8,600 $8,600 $56,000 $66,000 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 910,000 $ 910,000 $ 910,000 The lessor's 1. Lease payments 2. Gross investment in the lease 3. Net investment in the lease The lessee's: 4. Lease payments 5. Right-of-use asset 6. Lease payable B

Answer 1

(A) The Leasor's

Situation 1

Lease term=7 years

Interest Rate = 8%

Estimated fair value =$0

Guaranteed by lease =$0

Annual lease payment=$1,30,000

Present value of annuity due=5.6229(From Table)

(1) Lease Payment = $130,000$\times$7=$910,000

(2) Gross Investment in Lease = $130,000$\times$7=$910,000

(3) Net Investment in Lease = $130,000$\times$5.6229=$730977

Situation 2

Lease term =7 years

Interest rate=10%

Estimated Fair value =$56,000

Guranteed by lease = $0

Present Value of Annuity due = 5.3553 (from Annuity due table)

PV factor=1/(1.1)⁷=0.5131

(1) Lease Payment = $130,000$\times$7+$56,000=$966,000

(2) Gross investment in Lease=$130,000$\times$+$56,000=$966,000

(3) Net Investment in lease=$130,000$\times$5.3553+$56,000$\times$0.5131=$696,189+$25,655=$721,844

Situation 3

Lease term = 8 years

Interest Rate = 9%

Estimated fair value= $8,600

Guranteed by Lease = $8,600

PV factor= 1/(1.09)⁸=0.5470

Present value of Annuity Due = 6.0330

(1) Lease Payment=$130,000$\times$8+$8,600=$1,048,600

(2) Gross Investment in lease=$130,000$\times$8+$8,600+$8,600=$1,057,200

(3) Net Investment in Lease = $130,000$\times$6.0330+(8,600+8,600)$\times$0.5470=$784,290+$94,084=$7936984

Situation 4

Lease Term = 8 years

Interest rate=11%

Estimated fair value = $56,000

Guranted by lease =$66,000

PV Factor=1/(1.11)⁸=0.4339

Present value of Annuity Due=5.7122

(1) Lease Payment = $130,000$\times$8+56,000=$1040000+$56,000=$1,096,000

(2) Gross Investment in Lease=$130,000$\times$8+$56,000+$66,000=$1,162,000

(3) Net Investment in Lease=$130,000$\times$5.7122+(56,000+66,000)$\times$0.4339=$7,955,218

(B) The Leasee's

Situation 1

(4) Lease Payment=7$\times$$130,000=$910,000

(5) Right of Use Asset=$130,000$\times$5.6229(From (A) Situation 1)=$730,977

(6) Lease Liability=$130,000$\times$5.6229=$730,977

Situation 2

(4) Lease Payment=7$\times$130,000+56,000=$966,000

(5) Right of use asset=$130,000$\times$5.3553+$56,000$\times$0.5131=$7,249,226

(6) Lease Liability=$130,000$\times$5.3553+$56,000$\times$0.5131=$7,249,226

Situation 3

(4) Lease Payment= $130,000$\times$8+$8,600=$1,048,600

(5) Right of Use Asset= $130,000$\times$6.0330+8,600$\times$.5470=$7,889,942

(6) Lease Liability=$7,889,942

Situation 4

(4) Lease Payment=$130,000$\times$8+$56,000=$1,096,000

(5) Right of Use Asset=130,000$\times$5.7122+56,000$\times$0.4339=$7,668,844

(6) Lease Liability=$7,668,844

Situation

		1	2	3	4
A	The Lessor's
	1.Lease Payment	910,000	966,000	1,048,600	1,096,000
	2. Gross Investment in the Assets	9,10,000	9,66,000	1,057,200	1,162,000
	3. Net Investment in the Lease	730,977	721,844	7,936,984	7,955,218
B	The Lessee's
	4. Lease Payment	910,000	966,000	1,048,600	1,096,000
	5. Right-of-use assets	730,977	7,249,226	7,889,942	7,668,844
	6. Lease Payable	730,977	7,249,226	7,889,942	7,668,844