Question

Exercise 15-24 (Static) Calculation of annual lease payments; residual value [LO15-2, 15-6]

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.)

Check 10 1 4 10% $50,000 $50,000 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 2 3 7 5 11% 9% $350,000 $75,000 $350,000 $45,000 4 8 12% $465,000 $ 465,000 2.5 points 0 0 $ 50,000 0 $ 7,000 $ 7,000 $ 45,000 $ 50,000 eBook Hint Print 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.) References Lease Payments Situation 1 Situation 2 Residual Value PV of Lease PV of Residual Right-of-use Asset/Lease Guarantee Payments Value Guarantee Liability $ 0 $ 50,000 $ 0 $ 50,000 $ 0 $ 0 0 $ 0 0 $ 0 $ 0 $ 0 Situation 3 Situation 4

Answer 1

	Lease Payments	Residual Value Guarantee	PV Of Lease Payments	PV Of Residual Value Guarantee	Right-of-use Asset/ Lease Liability
Situation 1	$ 14,340	$ 0	$ 50,000	$ 0	$ 50,000
Situation 2	$ 62,310	$ 0	$ 325,917	$ 0	$ 325,917
Situation 3	$ 16,617	$ 0	$ 70,450	$ 0	$ 70,450
Situation 4	$ 79,947	$ 5,000 {$50,000-$45,000}	$ 444,806	$2,019	$ 446,825 {$444,806+ $2,019}

Explanation :

Situation 1

Lease Payments = $ 50,000 / 3.48685 = $ 14,340

Lease Payments = $ 14,340 (Rounded )

Present value of annuity due factor $ 1 for n= 4 , i= 10% is 3.48685

Situation 2

Lease Payments = (Fair Value - Present value of Residual Value )/ Present Value of Annuity due Factor

Present Value of Residual Value = $ 50,000 * 0.48166 = $24,083

Present value of $ 1 , n=7 , i= 11% is 0.48166

Present value of annuity due factor $ 1 for n= 7 , i= 11% is 5.23054

Lease Payments = (Fair Value - Present value of Residual Value )/ Present Value of Annuity due Factor

Lease Payments = ($350,000 - $24,083)/ 5.23054

Lease Payments = $ 62,310 (Rounded)

Present Value of Lease Payments = (Fair Value - Present value of Residual Value )

Present Value of Lease Payments = ($350,000 - $24,083)

Present Value of Lease Payments = $ 325,917

Situation 3

Lease Payments = (Fair Value - Present value of Residual Value )/ Present Value of Annuity due Factor

Present Value of Residual Value = $ 7,000 * 0.64993 = $ 4,550 (Rounded)

Present value of $ 1 , n=5 , i= 9% is 0.64993

Present value of annuity due factor $ 1 for n= 5 , i= 9% is 4.23972

Lease Payments = (Fair Value - Present value of Residual Value )/ Present Value of Annuity due Factor

Lease Payments = ($75,000 - $4,550)/ 4.23972

Lease Payments = $ 16,617 (Rounded)

Present Value of Lease Payments = (Fair Value - Present value of Residual Value )

Present Value of Lease Payments = ($75,000 - $4,550)

Present Value of Lease Payments = $ 70,450

Situation 4

Lease Payments = (Fair Value - Present value of Guaranteed Residual Value )/ Present Value of Annuity due Factor

Present Value of Guaranteed Residual Value = $ 50,000 * 0.40388 = $ 20,194 (Rounded)

Present value of $ 1 , n=8 , i= 12% is 0.40388

Present value of annuity due factor $ 1 for n= 8 , i= 12% is 5.56376

Lease Payments = (Fair Value - Present value of Guaranteed Residual Value )/ Present Value of Annuity due Factor

Lease Payments = ($465,000 - $20,194)/ 5.56376

Lease Payments = $ 79,947 (Rounded)

Present Value of Lease Payments = (Fair Value - Present value of Guaranteed Residual Value )

Present Value of Lease Payments = ($465,000 - $20,194)

Present Value of Lease Payments = $ 444,806

Present Value of Residual Value Guarantee = ($50,000 -$45,000)* 0.40388

Present Value of Residual Value Guarantee = $5,000 * 0.40388

Present Value of Residual Value Guarantee = $ 2,019 (Rounded)