Each of the three independent situations below describes a non-operating lease i
ID: 2445429 • Letter: E
Question
Each of the three independent situations below describes a non-operating lease in which annual lease payments are payable at the beginning of each year. The Lessee is aware of the Lessor’s implicit rate of return:
Situation
1
2
3
Lease Term (years)
10
20
4
Lessor’ rate of return
11%
9%
12%
Lessee’s incremental borrowing rate
12%
10%
11%
Fair value of Leased Asset
$600,000
$980,000
$185,000
Requirements: For each situation, determine:
A). The amount of the annual lease payments as calculated by the Lessor.
B). The amount the Lessee would record as an asset and liability.
1
2
3
Lease Term (years)
10
20
4
Lessor’ rate of return
11%
9%
12%
Lessee’s incremental borrowing rate
12%
10%
11%
Fair value of Leased Asset
$600,000
$980,000
$185,000
Explanation / Answer
A. Installment Payments EMI = P x r(1+r)^n/((r+1)^n-1) Situation 1. P = 600,000 r = 0.11 n = 10-1 =9 years So, EMI =( 600,000-EMI) x 0.11x1.11^9/(1.11^9-1) Or, EMI = (600000-EMI) x 0.180602 Or EMI(1+0.180602)=600,000 x 0.180602 Hence, EMI = 108361/1.180602 = 91784.56 Situation 2. P = 980,000 r = 0.09 n = 20-1 =19 years So, EMI =( 980,000-EMI) x 0.09x1.09^19/(1.09^19-1) Or, EMI = (980000-EMI) x 0.1117304 Or EMI(1+0.117304)=980,000 x 0.1117304 Hence, EMI = 109495.80/1.1117304= 98491.33 Situation 3. P = 185,000 r = 0.12 n = 20-1 =19 years So, EMI =( 185,000-EMI) x 0.12x1.12^3/(1.12^3-1) Or, EMI = (185000-EMI) x 0.416349 Or EMI(1+0.416349)=185,000 x 0.416349 Hence, EMI = 77024.56/1.416349= 54,382.47 Question B. Situation 1 2 3 No of Emis 10 20 4 Annual Emi 91784.56 98491.33 54382.47 Total Payment 917845.6 1969827 217529.9 Less: Lease Amount 600000 980000 185000 Interest Amount 317845.6 989826.6 32529.88 Assets to be recorded 600000 980000 185000 Liabilities to be recorded 917845.6 1969827 217529.9