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
	1	2	3
Lease term (years)	10	15	5
Lessor's rate of return (known by lessee)	12%	10%	12%
Lessee's incremental borrowing rate	10%	11%	11%
Fair value of lease asset	$630,000	$995,000	$200,000

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	$ 111,500	$ 630,000.00
Situation 2	$ 130,816	$ 995,000.00
Situation 3	$ 55,482	$ 200,000.00

Particulars	Situations
	1	2	3
Fair value of leased assets (P)	$ 630,000	$ 995,000	$ 200,000
Rate of Return (r)	12%	10%	12%
Lease term (n)	10	15	5
(Q) PVAD(r%,n)	5.65022	7.60608	3.60478
Annual Lease payment (P/Q)	$ 111,500	$ 130,816	$ 55,482

	Situations
	1	2	3
1.Annual Lease Payments	$ 111,500	$ 130,816	$ 55,482
2.PVAD(r%,n)	5.65022	7.60608	3.60478
3.Right of Use of Assets/Lease Payable(1*2)	$ 630,000.00	$ 995,000.00	$ 200,000.00

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