Question

Each of the four independent situations below describes a sales-type lease in which annual lease payments of $170,000 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 11% 10% 12% 12% Lease term (years) Lessor's and lessee's interest rate Residual value: Estimated fair value Guaranteed by lessee $64,000 $9,400 $9,400 $64,000 $74,000 Determine the following amounts at the beginning of the lease: (Round your intermediate and final answer to the nearest whole dollar amount.) Situation 1 2 3 4 A The lessor's: 1. Total lease payments 2. Gross investment in the lease 3. Net investment in the lease The lessee's: 4. Total lease payments 5. Right-of-use asset 6. Lease liability

Answer 1

Ans:

Requirement-A (The Lessor's) Situation Particulars Lease Payments Gross Investments in Lease Net Investment in the Lease $ $ 1,190,000 $ 1,190,000 $ 889,191 $ 1,190,000 $ 1,254,000 $ 943,236 $ 1,369,400 $ 1,378,800 $ 953,432 $ 1,434,000 1,498,000 1,001,575 Notes: Lease Payments=(Annual lease payments*Number of Years) + Guaranteed by Lessee Gross Investments in Lease=Lease Payments + Estimated Fair Value+Guaranteed Net Investment in lease=PV of annuities + PV of estimated fair value + PV of Guaranteed by lessee Net Investment in the lease (Situation-1)=PV(11%,6,-170000,0)+170000+PV(11%,7,0,-0)=719191+170000+0=889191 Net Investment in the lease (Situation-2)=PV(10%,6,-170000,0)+170000+PV(10%,7,0,-64000)-740394+170000+32842=943236 Net Investment in the lease (Situation-3)=PV(12%,7,-170000,0)+170000+PV(12%,8,0,-18800)=775839+170000+7593=953432 Net Investment in the lease (Situation-4)-PV(12%,7,-170000,0)+170000+PV(12%,8,0,-138000)-775839+170000+55736=1001575

Requirement-B (The Lessee's) Situation $ $ Particulars Lease Payments Right-of-use of Asset Lease Liability 1,190,000 889191 889191 1,190,000 $ 910394 910394 1,369,400 $ 949636 949636 1,434,000 975726 975726 Notes: Lease Payments=(Annual lease payments*Number of Years)+ Guaranteed by Lessee Right-to-use of asset=lease Liability=PV of Annuities+PV of Guaranteed by Lessee Right-of-use of Asset=Lease Liability=Situation 1=PV(11%,6,-170000,0)+170000+PV(11%,7,0,-0)=719191+170000+0=889191 Right-of-use of Asset=Lease Liability=Situation 2=PV(10%,6,-170000,0)+170000+PV(10%,7,0,-0)-740394+170000+0=910394 Right-of-use of Asset=Lease Liability=Situation 3=PV(12%,7,-170000,0)+170000+PV(12%,8,0,-9400)=775839+170000+3797=949636 Right-of-use of Asset=Lease Liability=Situation 4=PV(12%,7,-170000,0)+170000+PV(12%,8,0,-74000)=775839+170000+29887=975726