Chapter 15 Homework Solution and etc.
BE15-12A and BE15-12B:
Calculate annual lease payments
Since James (the lessor) will retain the title after the lease term, James will include the RV (does not matter whether RV is guaranteed
as in BE15-12A
or not as in BE15-12B
) in its annual lease payments calculation. Therefore, the answers for these two questions are
James will use the lease term (i.e. 4 years), not the economic life of the leased equipment, to determine the annual lease payments.
Amount to be recovered through leasing = Fair value of the leased asset = the PV of annuity due + PV of GRV
I.e. $700,000 = Annual rental payments x PVA (Table 6, i=5%, n=4) + $100,000 x PV(Table 6, i=5%, n=4)
= Annual rental payments x 3.72325 + $100,000 x 0.82270
= Annual rental payments x 3.72325 + $82,270
So, Annual rental payments = ($700,000 - $82,270)
Actually, first of all, we need to know how to classify this lease:
Transfer of title?
Bargain purchase option?
75% of useful life
75% x 6 years = 4.5; 2 lease years < 4.5 years
PV of MLP
90% of fair value
90% of fair value = 90% x $90,000 = $81,000
PV of MLP = 10,000 x PVA(Table 4, i=5%,n=4) = 10,000 x 3.54595
= $35,459.5 < $81,000
Since none of the 4 criteria satisfy, this is an operating lease for both the Lessee and the Lessor. Here are the side-by-side comparisons
of the entries: (Note that payments start 6 months later)
Inception of the lease (1/1/2006):
1st rent payment (6/30/2006):