Each of the four independent situations below describes a capital lease in which

Question

Each of the four independent situations below describes a capital lease in which annual lease payments are payable at the beginning of each year. (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    4   Lease term (years) 4 7 5 8   Lessor’s rate of return 10 % 11 % 9 % 12 %   Fair value of leased asset $ 61,000 $ 361,000 $ 86,000 $ 476,000   Lessor’s cost of leased asset $ 61,000 $ 361,000 $ 56,000 $ 476,000   Residual value:      Guaranteed by lessee 0 $ 61,000 0 $ 41,000      Unguaranteed 0 0 $ 18,000 $ 26,000

Explanation / Answer

Situation 1 2 3 4 Lease term (years) 4 7 5 8 Lessor’s rate of return 10% 11% 9% 12% Fair value of leased asset A $      61,000 $      361,000 $      86,000 $      476,000 Lessor’s cost of leased asset $      61,000 $      361,000 $      56,000 $      476,000 Residual value: Guaranteed by lessee 0 $        61,000 0 $        41,000 Unguaranteed 0 0 $      18,000 $        26,000 PVAD $1 B 3.48685 5.23054 4.23972 5.56376 PV $1 C 0.683 0.482 0.650 0.404 Amount to be recovered(fair value) $      61,000 $      361,000 $      86,000 $      476,000 Less: Present value of the residual value 0 $              29,402 $           11,700 $              27,068 Amount to be recovered through periodic lease payments D $      61,000 $      331,598 $      74,300 $      448,932 Lease payments at beginning D/B $ 17,494.30 $   63,396.51 $ 17,524.74 $   80,688.60

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