Question

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.)

Answer 1

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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