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. (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 Lease term (years) Lessor's rate of return Fair value of lease asset Lessor's cost of lease asset Residual value: 8% 9% 7% 10% $55,000 $355,000 $80,000 $470,000 $55,000 $355,000 $50,000 470,000 Estimated fair value Guaranteed fair value 0 55,000 $12,000 50,000 0 $12,000 $55, 000 Required: a. & b. Determine the amount of the annual lease payments as calculated by the lessor and the amount the lessee would record as a right-of-use asset and a lease liability, for above situations. (Round your PV factor answers to 5 decimal places and other answer to nearest whole dollar.) Right-of-use Asset/Lease Liabilit Residual Value Lease PaymentsGuarantee PV of Lease Payments PV of Residual Value Guarantee o 55,000$ 55,000 Situation 1 Situation 2 Situation 3 Situation4 5,000

Answer 1

Ans: Situation 1   
Lease Term    5Years
Fair Value of the Lease   $55,000
Interest rate    8%
Lessor's cost   $55,000
Sum Of PVF For 5 years @8%   3.99271
Annual Lease Payment = $ 55,000/3.99271
   = $13,775

Situation 2   
Lease Term    8Years
Fair Value of the Lease   $355,000
Interest rate    9%
Lessor's cost   $355,000
Estimated Fair Value   $55,000
Sum Of PVF For 5 years @8%   5.53482
Annual Lease Payment = 355,000/5.53482
   = $64,139

Situation 3  
Lease Term    6Years
Fair Value of the Lease   $80,000
Interest rate    7%
Lessor's cost   $50,000
Estimated Fair Value   $12,000
Guaranted Residual Value   $12,000
Sum Of PVF For 5 years @8%   4.76654
Present Value of Guaranted Residual value = $12,000*0.66634
   = $7,996
Annual Lease Payment = ($80,000-$7,996)/4.76654
= $15,106

   PV of Lease Payments= $80,000-$7,996

= $70,014
Situation 4  
Lease Term    9Years
Fair Value of the Lease   $470,000
Interest rate    10%
Lessor's cost   $470,000
Estimated Fair Value   $50,000
Garunteed Residual Value   $55,000
Sum Of PVF For 5 years @8%   5.75902
Present Value of Garunteed Residual value = $55,000*0.42410
   = $23,325
  
Annual Lease Payment = ($470,000-$23,325)/5.75902
= $77,561
  
PV of Lease Payments= $470,000-$23,325

=$446,675

	Lease Payment	Residual Value Guarantee	PV of Lease Payment	PV of Residual Value Guarantee	Right -Of- Use Assets/Lease Liability
Situation 1	$13,775	0	$55,000	0	$55,000
Situation 2	$64,139	0	$355,000	0	$355,000
Situation 3	$15,106	$12,000	$70,014	$7,996	$80,000
Situation 4	$77,561	$55,000	$446,675	$23,325	$470,000