A lessor entered into a 5-year lease appropriately classified as a sales-type lease. The cost of the underlying as- set was $40,000 and the fair value of the asset was $50,000. The lease included a purchase option that allowed the lessee to purchase the underlying asset for $5,000 at the end of the lease. Because of the discount offered in the purchase option from the expected residual value of $7,000, the lessor is reasonably certain that the lessee will exercise the purchase option. The first lease payment will be made immediately, with annual payments due throughout the lease term.

Required

a. Assuming that the lessor had a desired rate of return of 6%, compute the annual lease payment.

b. Assume the same facts (original scenario) except that the exercise of the option is not reasonably certain. Compute the annual lease payment.

c. Assume the same facts (original scenario) except that lessors desired rate of return is 8%. Compute the annual lease payment.

d. Assume the same facts (original scenario) except that the lease allows the ownership of the leased asset to revert to the lessee at lease end. Compute the annual lease payment.

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