The deluxe corporation has just signed a 168-month lease on an asset with a 19-y

Question

The deluxe corporation has just signed a 168-month lease on an asset with a 19-year life. The minimum lease payments are $ 1,300 per month (15,600 per year) and are to be discounted back to the present at a 9 percent annual discount rate. The estimated fair calue of the property is $165,000.

A.) Calculate the lease period as a percentage to the estimated life of the leased property. (SHOW ALL WORK)

B.) Calculate the present value of lease payments as a percentage to the fair value of the property. (SHOW ALL WORK)

C.) Should the lease be recoreded as a capital lease or an operating lease?

Explanation / Answer

Lease period =168 months =168/12=                            14.00 years Asset Life =                                  19 years A Lease period as% of Asset life =14/19= 73.68% Annual discount rate = 9% Monthly discount rate = 9/12%= 0.7500% Monthly lease payment =1300 PV of annuity = PV =A[*(1+k)^n-1]/k*(1+k)^n Here A= 1300 k=0.75% per month n=168 months PV =1300*(1.0075^168-1)/(0.0075*1.0075^168)                                                                  =                       123,935 So PV of the lease payments =$123,935 Fair value of the asset =$165,000 B PV of Lease payments as % of asset fair value= 75.11% C As the lease term is lower than 75 % of the   asset life and the PV of the lease rentals is less than 95% of the asset value, the lease will be treated as an Operating Lease.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.