Hi. I need help with part 2 of this question. I calculated the annual lease payments for Branch but I don't know how my professor got the answer for #2.

On January 1, 2015, Jefferson Company leased a delivery truck from Branch Motors. Branch paid $40,000 for the truck. Its retail value is $45,114.

The lease agreement specified annual payments of $10,000 beginning January 1, 2015, the inception of the lease, and at each January 1 through 2018. Branch Motors interest rate for determining payments was 10%, which has been communicated to Jefferson Company. At the end of the four-year lease term (December 31, 2018) the truck was expected to be worth $15,000, all of which is guaranteed by CGI Corp. The estimated useful life of the truck is five years with no salvage value. Both companies use straight-line depreciation. Jeffersons incremental borrowing rate is 9%.

Collectibility of the lease payments by Jefferson Company is reasonable predictable and there are no costs to the lessor that are yet to be incurred.

1. Show how Branch Motors calculated the $10,000 annual lease payments.
2. 45114 - 10245 (PV of 1 = 15000*.68301 Table) = 34869.
3. 34869 / 3.48685 (PV of Annuity due) = 10,000

2. How should this lease be classified by Jefferson (the lessee)? Why? (Prove all 4 steps)

• No transfer of ownership
• No bargain purchase
• Yes - 75 % rule
• ?? - 90 % rule
• My answer: 10000 (lease payment) + 10245 (guranteed residual value = 15000*.68301 'pv of 1') = 20245
• 20245 * (3.53129 = PV of Annuity due) = 71490.96
• CORRECT Answer = 10,000 * 3.53129 (PV of Annuity due ) = 35313.

How am I off by so much?