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)	11	21	5
Lessor's rate of return (known by lessee)	10%	8%	11%
Lessee's incremental borrowing rate	11%	9%	10%
Fair value of lease asset	$700,000	$1,080,000	$285,000

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

Answer Situation - 1 fair value of Asset Lease payment = present value of $1) at implicit interest ratefor lease period. Il years → falo value of Leave alset $ 700,000 → Interest rate (0) (10%) → Lease Term * present Value of an ordinary annuelty of $ 1:(n=11, 1 = 10%. + 6.8897 Lease payment =800,000 6.889 l Lease payment = $101,6 11 © I Right of Lease asset $ 709000 (101,611 X 6.889) Scanned with CamSchmer

Situatione @ Lease payment Lease payment = fair value of Asset present value of $1 at implicit interest rate for lease period. → fair valere of lease Asset $ 1080.000 * Interest rate (0) 89%. → Lease Term diyears → present value of an ordinary ammauity of | $ 20.1=21;928% = 10.818) * Lease payment = 1080000 10.818 | Lease payment = $99833) © Right of lease Ascet $ 1080,000 99,833 X 10.818) Scanned with CamScanner

sislation @ Lease paymont = fair value of Asset aument Present value of & lat implicat interest rate for leale pericol. > fair value of lease aset $ 285,000 → Interest sate (8) 11%, for leasepayment 10% for asset value dease Term → present Value of an ordinary annuity of [ $1: n=4 ,1 -11%. > 3.404 → present Value of an annuity of 1 $1:n=4,i=10% = 3.4871 ® Leate payment = 285000 3.444 Lease payment = $ 82752 Right of lease aseet cs Camp 285000 (89,752 X 10.818)) #-1

*# -1) Thil anaunt Exceeds the asset the value Lesses Briuse Capitalize the $285,000 fair value instead 10% 11 ) 0-909 0.826 0.751 3.48685 1.000 0,901 0.812 0.731 3.44371 Lease Right of use payment Asset | Leafe payable situationo $ 101,611 $ 700,000 situation@ $ 99,833 $ 1,080,000 stration $ 89,752 $ 285,000 Sca CamScanner