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(a) Computation of annual payments Cost (fair value) of leased asset to lessor Less: Present value of salvage value (residual value in this case)

(a) Computation of annual payments Cost (fair value) of leased asset to lessor Less: Present value of salvage value (residual value in this case) $140,700 $15,480 x 0.85734 (Present value of 1 at 8% for 2 periods) 13,272 Amount to be recovered through lease payments Two periodic lease payments $127,428 + 1.78326 $127,428 $71,458

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