Question
For each of the three independent situations below determine the amount of the annual lease payments. Each describes a finance lease in which annual lease
For each of the three independent situations below determine the amount of the annual lease payments. Each describes a finance lease in which annual lease payments are payable at the beginning of each year. Each lease agreement contains an option that permits the lessee to acquire the leased asset at an option price that is sufficiently lower than the expected fair value that the exercise of the option appears reasonably certain. (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) | 6 | 6 | 5 | ||||||
| Lessor's rate of return | 9 | % | 10 | % | 8 | % | |||
| Fair value of leased asset | $ | 68,000 | $ | 424,000 | $ | 189,000 | |||
| Lessor's cost of leased asset | $ | 54,000 | $ | 424,000 | $ | 149,000 | |||
| Purchase option: | |||||||||
| Exercise price | $ | 14,000 | $ | 54,000 | $ | 26,000 | |||
| Exercisable at end of year: | 6 | 6 | 4 | ||||||
| Reasonably certain? | yes | no | yes | ||||||
Determine the annual lease payments for each situation: (Round your intermediate and final answers to the nearest whole dollar amount.)
Answer is complete but not entirely correct.
|
| ituation 1: | |
| Amount to be recovered (fair value) | $68,000 |
| (Less): Present value of Bargain purchase option | $8,348 |
| [$14,000 x 0.5963 PV factor (9%, 6 years)] | |
| Amount to be recovered through periodic lease payments | $76,348 |
| Present value annuity factor (9%, 6 years) | 4.4859 |
| = Annual lease payments | $17,020 |
| Situation 2: | |
| Amount to be recovered (fair value) | $424,000 |
| (Less): Present value of Bargain purchase option | $30,483 |
| [$54,000 x 0.5645 PV factor (10%, 6 years)] | |
| Amount to be recovered through periodic lease payments | $454,483 |
| Present value annuity factor (10%, 6 years) | 4.3553 |
| = Annual lease payments | $104,352 |
| Situation 3: | |
| Amount to be recovered (fair value) | $189,000 |
| (Less): Present value of Bargain purchase option | $17,696 |
| [$26,000 x 0.6806 PV factor (8%, 5 years)] | |
| Amount to be recovered through periodic lease payments | $206,696 |
| Present value annuity factor (8%, 5 years) | 3.9927 |
| = Annual lease payments | $51,768 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Fundamental accounting principle
Authors: John J. Wild, Ken W. Shaw, Barbara Chiappetta
21st edition
1259119831, 9781259311703, 978-1259119835, 1259311708, 978-0078025587
