Question

Each of the three 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.) Situation 1 2 3 Lease term (years) 10 20 5 Lessor's rate of return (known by lessee) 11% 9% 12% Lessee's incremental borrowing rate 12% 10% 11% Fair value of lease asset $720,000 $1,100,000 $305,000 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.)

Answer 1

	Lease Payments	Right of Use of Assets/Lease Payable
Situation 1	$ 110,091.74	$ 720,000.00
Situation 2	$ 110.552.76	$ 1,100,000.00
Situation 3	$ 75,495.04	$ 305,000.00

Particulars	Situations
	1	2	3
Fair value of leased assets (P)	$ 720,000	$ 1,100,000	$ 305,000
Rate of Return (r)	11%	9%	12%
Lease term (n)	10	20	5
(Q) PVAD(r%,n)	6.54	9.95	4.04
Annual Lease payment (P/Q)	$ 110,091.74	$ 110,552.76	$ 75,495.04

	Situations
	1	2	3
1.Annual Lease Payments	$ 110,091.74	$ 110,552,.76	$ 75,495.04
2.PVAD(r%,n)	6.56	9.95	4.04
3.Right of Use of Assets/Lease Payable(1*2)	$ 720,000.00	$ 1,100,000.00	$ 305,000.00