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.

Situations	1	2	3	4
Lease term (years)	3	4	5	6
Lessor's rate of return	9%	8%	7%	6%
Fair value of lease asset	$60,000	$90,000	$92,000	$85,000
Lessor's cost of leased asset	$55,000	$75,000	$78,000	$85,000
Residual Value:
Estimated fair value	0	$20,000	$16,000	$14,000
Guaranteed fair value	0	0	$16,000	$20.000

Calculate the amount the lessee would record as a right-of-use asset, for each of the above situations. Round to the nearest dollar. Format ($XX,XXX)

Situation 1:

Situation 2:

Situation3:

Situation4:

Answer 1

	Lease payments	Residual value guarantee	PV of lease payments	PV of residual value Guarantee	Right-of-use Asset/lease liability
Situation 1	23,703	0	60,000	0	60,000
Situation 2	22,735	0	75,300	0	75,300
Situation 3	19,656	0	80,592	0	80,592
Situation 4	14,966	5,000	73,592	4,229	77,821

Situation 1

Fair Value of the asset	60,000
Present value of annuity due factor for n = 3 and i=9%	2.53129
Lease Payments at the beginning of each of the next three years(60,000/2.53129)	23,703

Situation 2

PV of residual value (20,000 * 0.73502)	14,700
Present value factor for n = 4 and i = 8%	0.73502
Present value of annuity due factor for n = 4 and i=8%	3.31212
Lease payments = (fair value – present value of residual value) / Present value of annuity due factor = (90,000-14,700) / 3.31212	22,735
Present value of lease payments = (fair value – present value of residual value) =90,000 - 14,700	75,300

Situation 3

PV of residual value (16,000 * 0.71298)	11,408
Present value factor for n = 5 and i = 7%	0.71298
Present value of annuity due factor for n = 5 and i=7%	4.10019
Lease payments = (fair value – present value of residual value) / Present value of annuity due factor = (92,000-11,408) / 4.10019	19,656
Present value of lease payments = (fair value – present value of residual value) =92,000 - 11,408	80,592

Situation 4

PV of guaranteed residual value (20,000 * 0.70486)	14,097
Present value factor for n = 6 and i = 6%	0.70486
Present value of annuity due factor for n = 6 and i=6%	4.91732
Lease payments = (fair value – present value of guaranteed residual value) / Present value of annuity due factor = (85,000-14,097) / 4.91732	14,966
Present value of lease payments = (fair value – present value of guaranteed residual value) =85,000 - 11,408	73,592
PV of residual value Guarantee =6,000*0.70486	4,229
Right-of-use Asset/lease liability (73,592 + 4,229)	77,821