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24 August, 10:27

Each of the independent situations below describes a lease requiring annual lease payments of $10,000. For each situation, determine the appropriate lease classification by the lessee and indicate why.

Lease term = 4

Asset useful life = 6

Asset's FV = $44,000

Bargain Purchase = No

Annual Lease Payment = Begining

Lessor's implicit rate = 5%

Lessee's incremental borrow rate = 5%

Lease term = 4

Asset useful life = 5

Asset's FV = $43,000

Bargain Purchase = Yes

Annual Lease Payment = End

Lessor's implicit rate = 6%

Lessee's incremental borrow rate = 5%

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  1. 24 August, 13:43
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    Does the agreement specify that ownership of the asset transfers to the lessee? NO

    Does the agreement contain a bargain purchase option? NO

    Is the lease termequal to75% or more of the expected NOeconomic life of the asset? NO (4 < (.75 X 6))

    Is the present value of the minimum lease payments equalto or greater than 90% of the fair value of the asset? NO

    10,000 X 3.72325

    = (37233 < (.9 X 44,000))

    Annuity due : n=4, i=5%.

    Does the agreement specify that ownership of the asset transfers to the lessee? NO

    Does the agreement contain a bargain purchase option? YES

    Is the lease termequal to75% or more of the expected NOeconomic life of the asset? Yes (4 >.75X5)

    Is the present value of the minimum lease payments equalto or greater than 90% of the fair value of the asset? NO

    35,456 < (.9 X 43,000)

    10,000 X 3.54595

    Ordinary annuity

    n=4, i = 5%.
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