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 $1and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

	Situation
	1	2	3
Lease term (years)	10	20	4
Lessor's rate of return (known by lessee)	11%	9%	12%
Lessee's incremental borrowing rate	12%	10%	10%
Fair value of lease asset	$600,000	$980,000	$185,000

  
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 answers to nearest whole dollar.)
  

Answer 1

Ans:

	Lease Payments	Right of Use of Assets/Lease Payable
Situation 1	$ 91,785.22	$ 600,000.00
Situation 2	$ 98,491.47	$ 980,000.00
Situation 3	$ 54,382.97	$ 185,000.00
Particulars	Situations
	1	2	3
Fair value of leased assets (P)	$ 600,000	$ 980,000	$ 185,000
Rate of Return (r)	11%	9%	12%
Lease term (n)	10	20	4
(Q) PVAD(r%,n)	6.537	9.9501	3.4018
Annual Lease payment (P/Q)	$ 91,785.22	$ 98,491.47	$ 54,382.97
	Situations
	1	2	3
1.Annual Lease Payments	$ 91,785.22	$ 98,491.47	$ 54,382.97
2.PVAD(r%,n)	6.537	9.9501	3.4018
3.Right of Use of Assets/Lease Payable(1*2)	$ 600,000.00	$ 980,000.00	$ 185,000.00