Question

Ayayai Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $487,263, and its guaranteed residual value at the end of the non-cancelable lease term is estimated to be $14,500. The hospital will pay rents of $59,000 at the beginning of each year. Ayayai incurred costs of $273,000 in manufacturing the machine and $13,000 in legal fees directly related to the signing of the lease. Ayayai has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 5%. Click here to view factor tables.

Discuss the nature of this lease in relation to the lessor.

The nature of this lease in relation to the lessor is

finance leasesales-type leaseoperating lease

.

Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 5,275.)

(1)		Lease receivable at commencement of the lease		$
(2)		Sales price		$
(3)		Cost of sales		$

Prepare a 10-year lease amortization schedule for Ayayai, the lessor. (Round answers to 0 decimal places e.g. 5,275.)

AYAYAI INC. (Lessor) Lease Amortization Schedule (Annuity due basis, guaranteed residual value)
Beginning of Year		Annual Lease Payment Plus Residual Value		Interest on Lease Receivable		Recovery of Lease Receivable		Lease Receivable
Initial PV		$		$		$		$
1
2
3
4
5
6
7
8
9
10
End of 10
		$		$		$

Answer 1

(1)

Year	Cash flows	PV@5%	Discounted value
0	72,000 [ 59,000 + 13,000]	1	72,000
1-9	59,000	7.1078	419,360
10	14,500	0.6139	8,902
			500,262

(2) Sales price = 487,263

(3) Cost of sales = 273,000 + 13,000 = 286,000

Lease Amortization schedule

Beginning of year	Annual lease payment plus residual value	Interest	Receovery of lease receivable	Lease receivable
Initial PV				487,263
0	59,000	0	59,000	428,263
1	59,000	21,413	37,587	390,676
2	59,000	19,534	39,466	351,210
3	59,000	17,561	41,439	309,771
4	59,000	15,489	43,511	266,200
5	59,000	13,310	45,690	220,510
6	59,000	11,026	47,974	172,536
7	59,000	8,627	50,373	122,163
8	59,000	6,108	52,892	69,271
9	59,000	3,464	55,536	13,735
10	14,500	765	13,735	0