Problem 15-9 - Problem159 Requirement1...

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Problem 15-9 Requirement 1 Lessor’s Calculation of Rental Payments Amount to be recovered (fair market value) $365,760 Less: Present value of the unguaranteed residual value ($25,000 x .68301 * ) (17,075 ) Amount to be recovered through periodic rental payments $348,685 _____________________ Rental payments at the beginning of each of four years: ($348,685 ÷ 3.48685 ** ) $100,000 Plus : Executory costs 4,000 Rental payments including executory costs $104,000 * present value of $1: n=4, i=10% ** present value of an annuity due of $1: n=4, i=10%
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Problem 15-9 (continued) Requirement 2 The lessee’s incremental borrowing rate (12%) is more than the lessor’s implicit rate (10%). So, both parties’ calculations should be made using a 10% discount rate:
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Application of Classification Criteria 1 Does the agreement specify that ownership of the asset transfers to the lessee? NO 2 Does the agreement contain a bargain purchase option? NO 3 Is the lease term equal to 75% or more of the expected NO economic life of the asset? {4 yrs < 75% of 6 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the YES fair value of the asset? {$348,685 a > 90% of $365,760} a See calculation below. Present Value of Minimum Lease Payments Present value of periodic rental payments excluding executory costs of $4,000 ($100,000 * x 3.48685 ** ) $348,685 ** present value of an annuity due of $1: n=4, i=10% * Since the residual value is not guaranteed , it is excluded from both the lessor’s and the lessee’s minimum lease payments and therefore does not affect the 90% of fair value test.
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This note was uploaded on 02/20/2009 for the course ACTG 344 taught by Professor Baril,c during the Spring '08 term at James Madison University.

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Problem 15-9 - Problem159 Requirement1...

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