Question

# Exercise 15-10 (Algo) Lessor calculation of annual lease payments; lessee calculation of asset and liability [LO15-2]...

Exercise 15-10 (Algo) Lessor calculation of annual lease payments; lessee calculation of asset and liability [LO15-2]

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 1 2 3 Lease term (years) 11 20 6 Lessor's rate of return (known by lessee) 11% 9% 12% Lessee's incremental borrowing rate 12% 10% 11% Fair value of lease asset \$790,000 \$1,075,000 \$280,000

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.)

Ans:

 Lease Payments Right of Use of Assets/Lease Payable Situation 1 \$ 127,285.91 \$ 790,000.00 Situation 2 \$ 117,763.05 \$ 1,075,000.00 Situation 3 \$ 68,103.32 \$ 280,000.00
 Particulars Situations 1 2 3 Fair value of leased assets (P) \$ 790,000 \$ 1,075,000 \$ 280,000 Rate of Return (r) 11% 9% 12% Lease term (n) 11 20 6 (Q) PVAD(r%,n) 6.2065 9.1285 4.1114 Annual Lease payment (P/Q) \$ 127,285.91 \$ 117,763.05 \$ 68,103.32
 Situations 1 2 3 1.Annual Lease Payments \$ 127,285.91 \$ 117,763.05 \$ 68,103.32 2.PVAD(r%,n) 6.2065 9.1285 4.1114 3.Right of Use of Assets/Lease Payable(1*2) \$ 790,000.00 \$ 1,075,000.00 \$ 280,000.00

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