Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $100,000 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.) Situation 2 4 1 3 Lease term (years) Lessor's and lessee's interest rate Residual value : 8 7 7 8 9% 11% 10% 12% Estimated fair value $50,eee $8,eee $8,e00 $50,eee $60,e0e e Guaranteed by lessee e Determine the following amounts at the beginning of the lease. (Round your intermediate and final answers to the nearest whole dollar amount.) Situation 2 3 4 The lessor's: A 700,000 $ 800,000 1. Lease payments 700,000 2. Gross investment in the lease 808,000 750,000 700,000 590,574 548,592 3. Net investment in the lease 547,137 The lessee's: B 700,000 800,000 4. Lease payments 700,000 5. Right-of-use asset 586,842 548,592 523,054 6. Lease payable 523,054 586,842 548,592

Answer 1

	Situation
	1	2	3	4
Lease Term	7	7	8	8
Interest rate	9%	11%	10%	12%
Residual value
Estimated	0	50000	8000	50000
Guaranteed by Leasee	0	0	8000	60000
Lessor
Lease payments (annual lease payment * no of years)	700,000	700,000	800,000	800,000
Gross investment
Lease payments annual	700,000	700,000	800,000	800,000
Guaranteed residual value	-	-	8,000	60,000
Unguaranteed residual value	-	50,000	-	-
Total	700,000	750,000	808,000	860,000
Net investment (Gross investment less interest cost)
PV of lease payments	PMT x (((1-(1 + r) ^- n)) / r)*(1+r)
PV of lease payments	100000*(((1-(1 + 9%) ^- 7)) / 9%)*(1+9%)	100000*(((1-(1 + 11%) ^- 7)) / 11%)*(1+11%)	100000*(((1-(1 + 10%) ^- 8)) / 10%)*(1+10%)	100000*(((1-(1 + 12%) ^- 8)) / 12%)*(1+12%)
PV of lease payments	548,592	523,054	586,842	556,376
PV of residual value	-	50000/(1+11%)^7	8000/(1+10%)^8	60000/(1+12%)^8
PV of residual value	-	24,083	3,732	24,233
Net investment (Gross investment less interest cost)	548,592	547,137	590,574	580,609
PV of annuity
P = PMT x (((1-(1 + r) ^- n)) / r)*(1+r)
Where:
P = the present value of an annuity stream
PMT = the dollar amount of each annuity payment
r = the effective interest rate (also known as the discount rate)
n = the number of periods in which payments will be made
Lessee
Lease payments (annual lease payment * no of years)	700,000	700,000	800,000	800,000
Lease payable
Lease payments annual	700,000	700,000	800,000	800,000
Guaranteed residual value by Leasee	-	-	8,000	60,000
Total lease payable gross	700,000	700,000	808,000	860,000
PV of lease payable
PV of lease payments	PMT x (((1-(1 + r) ^- n)) / r)*(1+r)
PV of lease payments	100000*(((1-(1 + 9%) ^- 7)) / 9%)*(1+9%)	100000*(((1-(1 + 11%) ^- 7)) / 11%)*(1+11%)	100000*(((1-(1 + 10%) ^- 8)) / 10%)*(1+10%)	100000*(((1-(1 + 12%) ^- 8)) / 12%)*(1+12%)
PV of lease payments	548,592	523,054	586,842	556,376
PV of residual value	-	-	8000/(1+10%)^8	60000/(1+12%)^8
PV of residual value	-	24,083	3,732	24,233
Lease payable	548,592	547,137	590,574	580,609
Right of use-asset	548,592	547,137	590,574	580,609