Information for 12, 13, and 14. n=6, i=% , PV Annuity Due: 4.79079, PV Single Su
ID: 2561176 • Letter: I
Question
Information for 12, 13, and 14.
n=6, i=% , PV Annuity Due: 4.79079, PV Single Sum: 0.56447
12. The lease agreement specifies six annual payments of $92,931 starting at the time of lease inception. Incremental borrowing rate= implicit rate=10%, There is an unguaranteed residual value of 60,000 at the end of the lease term. The lease is correctly classified as a sales type lease for the lessor and a capital lease for the lessee. At the inception before recording the first payment
a. Lessor’s Sale is $479,081
b. Lessor’s gross investment in the lease is $617,586
c. Lessee’s lease liability is $479,081
d. None of above
13. The lease agreement specifies six annual payments of $92,931 starting at the time of lease inception, Jan. 1 of year1. Incremental borrowing rate= implicit rate=10%, the lessee guaranteed a residual value of $60,000 at the end of the lease term. The lease is correctly classified as a capital lease for the lessee and a direct financing lease for the lessor.
a. Lessor’s gross investment in the lease at the inception before the first payment is $557,586
b. Lessee’s lease liability at the inception before the first payment is $479,081
c. Lessee’s leased asset at the inception before the first payment is $445,213
d. Lessor’s interest revenue for the year1 is 45,023
14. The lease agreement specifies six annual payments of $92,931 starting at the time of lease inception. Incremental borrowing rate= implicit rate=10%, The bargain purchase option price at the end of the lease term is $60,000. The lease is correctly classified as a capital lease for the lessee and a sales type lease for the lessor.
At the inception before recording the first payment
a. Lessor’s Sale is $479,081
b. Lessor’s gross investment in the lease is $557,586
3. Lessee’s lease liability is $445,213
d. Lessee’s leased asset is $445,213
The answer is B,B,A
How to calculate the answers?
Explanation / Answer
12.Lessor’s gross investment in the lease:
Lessor’s gross investment in the lease=Sum of minimum lease payments + Unguaranteed residual value
=$92,931*6+$60,000=$617,586
Present value(PV) of payments at 10% discount= $445,212.61 (Using PV function of excel, with Rate=10%,Nper=6,Pmt=92931,Type=1(payment at beging of the period)
$60,000 is not guarranteed
It is not $479,081.
Hence A and C are wrong.
B is the correct answer as shown above
13. $60,000 is guaranteed. Hence should be included in Leasee’s liability
Leasee’s lease liability calculation is given below:
PV of amount=(Amount)/((1+i)^N)
i=Interest rate=10%=0.1, N= year of payment
N
A
B=(A/(1.1^N)
Year
Amount
PV of amount
0
$ 92,931
$ 92,931
1
$ 92,931
$ 84,483
2
$ 92,931
$ 76,802
3
$ 92,931
$ 69,820
4
$ 92,931
$ 63,473
5
$ 92,931
$ 57,703
6
$ 60,000
$ 33,868
Total
$ 479,081
Hence B is correct answer
14. Lessors Sale =Present value of payments to be received=$479,081
Correct answe:A
Calculation given below:
PV of amount=(Amount)/((1+i)^N)
i=Interest rate=10%=0.1, N= year of payment
N
A
B=(A/(1.1^N)
Year
Amount
PV of amount
0
$ 92,931
$ 92,931
1
$ 92,931
$ 84,483
2
$ 92,931
$ 76,802
3
$ 92,931
$ 69,820
4
$ 92,931
$ 63,473
5
$ 92,931
$ 57,703
6
$ 60,000
$ 33,868
Total
$ 479,081
PV of amount=(Amount)/((1+i)^N)
i=Interest rate=10%=0.1, N= year of payment
N
A
B=(A/(1.1^N)
Year
Amount
PV of amount
0
$ 92,931
$ 92,931
1
$ 92,931
$ 84,483
2
$ 92,931
$ 76,802
3
$ 92,931
$ 69,820
4
$ 92,931
$ 63,473
5
$ 92,931
$ 57,703
6
$ 60,000
$ 33,868
Total
$ 479,081