Question

Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the end 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 15 8% Lease term (years) Lessor's rate of return Lessee's incremental borrowing rate Fair value of lease asset 10% 11% $610,000 9% 11% 10% $190,000 $985,000 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 the nearest whole dollar.) Lease Payments Right-of-use Asset/Lease Payable Situation 1 Situation 2 Situation 3

Answer 1

A F Working Situation 1 Situation 2 Situation 3 $ 6,10,000$ 9,85,000 $ 1.90,000 5.33493 8.55948 2.44371 (10% n=8) (8% n=15) (11% n=3) $ 1,14,341 $ 1,15,077 $ 77,751 Year 1 Lease Payments 2 Particulars 3 Fair value of asset 4 Present value of annuity due 5 6 Lease payments as calculated by lessor 7 8 Right of use asset: 9 s 10 Lease payments 11 Present value of annuity due 12 13 Right-of use asset/lease payable 14 15 Situation 1 Situation 2 Situation 3 $ 1,14,341 $ 1,15,077 $ 77,751 5.33493 8.55948 2.44371 (10% n=8) (8% n=15) (11% n=3) $ 6,10,000 $ 9,85,000 $ 1,90,000 PV @10% PV @8% PV @11% 1 0.90909 0.92593 0.90090 2 0.82645 0.85734 0.81162 31 0.75131 0.79383 0.73119 4 0.68301 0.73503 5 0.62092 0.68058 6 0.56447 0.63017| 7 0.51316 0.58349 8 0.46651 0.54027| 0.500251 0.463191 0.42888 0.39711 13 0.36770 14 0.34046 15 0.31524 present value Annuity Due 5.33493 8.55948 2.44371 10

Working 1 Lease Payments 2 Particulars 3 Fair value of asset 4 Present value of annuity due 5 6 Lease payments as calculated by lessor Situation 1 610000 5.33493 (10% n=8) =+B3/B4 Situation 2 985000 8.55948 (8% n=15) =+C3/C4 Situation 3 190000 2.44371 (11% n=3) =+D3/D4 Year PV @11% =1/1.11“F5 =1/1.114F6 =1/1.114F7 8 Right of use asset: 95 10 Lease payments 11 Present value of annuity due 12 13 Right-of use asset/lease payable PV @10% =1/1.1"F5 =1/1.1"F6 =1/1.1"F7 1=1/1.1"F8 =1/1.1"F9 =1/1.1 F10 =1/1.1 F11 =1/1.1 F12 Situation 1 Situation 2 Situation 3 [114340.769232211 (115077.084121933 77750.6332584472 5.33493 8.55948 2.44371 (10% n=8) (8% n=15) (11% n=3) =+B10*B11 =+C10*C11 =+D10*D11 PV @ 8% =1/1.08 F5 =1/1.08 F6 =1/1.08 F7 =1/1.08 F8 =1/1.08 F9 =1/1.08 F10 =1/1.08 F11 =1/1.08 F12 =1/1.08 F13 =1/1.08 F14 1/1.08°F15 =1/1.08 F16 =1/1.08 F17 =1/1.08 F18 =1/1.08 F19 =SUM(H5:H19) present value Annuity Due =SUM(G5:G19) =SUM(15:17)