. WFFm has found a flatbed trailer on which it could load the tractor to move it
ID: 2603431 • Letter: #
Question
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WFFm has found a flatbed trailer on which it could load the tractor to move it. The trailer is offered for ata cash only price of $15,000, but could be leased for 4 years for an annual payment of $3000. A payment is due at the inception of the lease, then at the end of each year, for a total of 5 payments.The effective interest rate for a trailer lease is 3.99%.
The useful life of this piece of equipment is 10 years. Data Cost Annual Lease payment Interest rate Term in Years Economic Life (Years) Present Value of payments Year (Time) Purchase PV of Lease pmts 0 1 2 3 4 Totals Lease or Buy? Lease Lease Type Criteria % PV/FMV Yes/No? Ownership Transfers at end of lease? Purchase Option? Lease term 75% or > than economic life? PV of pmts >90% of Fair Value? Special Purpose? Classifiy the Asset? (PP&E, Operating , or Finance ) Lease Amortization Table Payment Date Cash Payment Interest Expense Decrease in Balance Balance PV of payments First payment Dec 31 of yr 1 Dec 31 of yr 2 Dec 31 of yr 3 Dec 31 of yr 4 Totals
Explanation / Answer
Data Cost $15,000 Annual Lease Payment $3,000 Interest Rate 3.99% Term in years 4 years Economic Life 10 years Present value of payments Year Purchase PV of Lease Pmts PV factor 0 $15,000 $3,000.00 1 2884.80 0.9616 2 2774.10 0.9247 3 2667.90 0.8893 4 2565.30 0.8551 Total $15,000 $13,892 Lease or buy? Lease Lease Type Criteria Ownership transfer at the end of the lease Yes Purchase Option Yes Lease Term 75% or >than economic life No PV of pmts >90% of Fair Value Yes Special Purpose No Classify the Asset Operating Lease Amortization Table Payment Date Cash Payment Interest Expenses Decrease in Balance Balance PV of Payments $13,892 First Payment $3,000 $3,000.00 $10,892 Dec 31 of yr 1 $3,000 $434.59 $2,565.41 $8,327 Dec 31 of yr 2 $3,000 $332.23 $2,667.77 $5,659 Dec 31 of yr 3 $3,000 $225.79 $2,774.21 $2,885 Dec 31 of yr 4 $3,000 $115.10 $2,884.90 ($0) Totals $15,000 $1,108 $13,892
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