Costs of negotiating and consummating the completed lease transaction incurred b
ID: 2425081 • Letter: C
Question
Costs of negotiating and consummating the completed lease transaction incurred by the lessor were $3,046.
The retail cash selling price of the leased asset was $518,000. Its useful life was three years with no residual value.
Collectibility of the lease payments by the lessor was reasonably predictable and there were no costs to the lessor that were yet to be incurred.
The lease term is three years and the lessor paid $518,000 to acquire the asset (direct financing lease).
f.
(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.)
Calculate the effective rate of interest revenue after adjusting the net investment by initial direct costs.
Terms of a lease agreement and related facts were: a.Costs of negotiating and consummating the completed lease transaction incurred by the lessor were $3,046.
b.The retail cash selling price of the leased asset was $518,000. Its useful life was three years with no residual value.
c.Collectibility of the lease payments by the lessor was reasonably predictable and there were no costs to the lessor that were yet to be incurred.
d.The lease term is three years and the lessor paid $518,000 to acquire the asset (direct financing lease).
e. Annual lease payments at the beginning of each year were $190,000.f.
Lessor’s implicit rate when calculating annual rental payments was 17%.(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.)
Calculate the effective rate of interest revenue after adjusting the net investment by initial direct costs.
Effective rate of interest $_________________Explanation / Answer
CALCULATION OF EFFECTIVE RATE OF INTEREST REVENUE AFTER ADJUSTING THE NET INVESTMENT BY INITIAL DIRECT COSTS
LET INTEREST REVENUE AFTER ADJUSTING THE NET INVESTMENT BY INITIAL DIRECT COSTS BE x
TOTAL COST OF ASSET TO LESSOR = 518000 + 3046 = $ 521046
TABLE: PRESENT VALUE OF NET CASH INFLOW
THEREFORE, PRESENT VALUE OF NET CASHINFLOW = 2.2095x - 419805
WE KNOW THAT, PRESENT VALUE OF CASH INFLOW = COST OF THE ASSET
THEREFORE, 2.2095x - 419805 = 521046
OR, x = (521046 + 419805) /2.2095 = $ 425821 (approx)
HENCE, INTEREST REVENUE AFTER ADJUSTING THE NET INVESTMENT BY INITIAL DIRECT COSTS IS $ 425821
YEAR NET CASH INFLOW (A) P.V FACTOR@ 17%(B) P.V OF NET CASHINFLOW (A X B) 1 (X-190000) 0.8547 0.8547x - 162393 2 (X-190000) 0.7305 0.7305x - 138795 3 (X-190000) 0.6243 0.6243x - 118617