Classifying Leases The following separate scenarios relate to a 5-year lease, pertaining to equipment with a fair value of $25,000. Assume in all scenarios that payments are made at the beginning of the period. 1. Lease payments include a fixed payment of $5,000 per year. 2. Lease payments include a fixed payment of $5,000 per year, plus $250 for insurance and $300 for a maintenance contract. 3. Lease payments will be $5,000 in the first year and will increase by 3% (calculated on the previous year's payment) for each of the following 4 years. 4. Lease payments will be $5,000 in the first year and will increase each of the following years by the increase in the CPI from the preceding year. The current CPI is 120 and is expected to increase to 122 at the end of the next year. 5. Lease payments will be $5,000 in the first year and will increase each of the following years by (a) the increase in the CPI from the preceding year, or (b) 3%, whichever is greater. The current CPI is 120 and is expected to increase to 122 at the end of the next year. 6. Lease payments include a fixed payment of $5,000 per year. In addition, the lessee has guaranteed the residual value of the equipment for $1,000 at the end of the lease. Required For each of the six separate scenarios outlined above, and considering only the fair value lease criterion, determine how the lessee would classify the lease, assuming a discount rate of 7%. Note: Round amounts in table to the nearest whole dollar. PV of Lease Payments 90% of Fair Value Lease Classification 0x Operating Lease 0x Finance Lease 0 Finance Lease ONS Oxs ONS ONS ONS ONS 0 Operating Lease 0 Finance Lease 0x Finance Lease 0 Ljóddng
Classifying Leases The following separate scenarios relate to a 5-year lease, pertaining to equipment with a fair value of $25,000. Assume in all scenarios that payments are made at the beginning of the period. 1. Lease payments include a fixed payment of $5,000 per year. 2. Lease payments include a fixed payment of $5,000 per year, plus $250 for insurance and $300 for a maintenance contract. 3. Lease payments will be $5,000 in the first year and will increase by 3% (calculated on the previous year's payment) for each of the following 4 years. 4. Lease payments will be $5,000 in the first year and will increase each of the following years by the increase in the CPI from the preceding year. The current CPI is 120 and is expected to increase to 122 at the end of the next year. 5. Lease payments will be $5,000 in the first year and will increase each of the following years by (a) the increase in the CPI from the preceding year, or (b) 3%, whichever is greater. The current CPI is 120 and is expected to increase to 122 at the end of the next year. 6. Lease payments include a fixed payment of $5,000 per year. In addition, the lessee has guaranteed the residual value of the equipment for $1,000 at the end of the lease. Required For each of the six separate scenarios outlined above, and considering only the fair value lease criterion, determine how the lessee would classify the lease, assuming a discount rate of 7%. Note: Round amounts in table to the nearest whole dollar. PV of Lease Payments 90% of Fair Value Lease Classification 0x Operating Lease 0x Finance Lease 0 Finance Lease ONS Oxs ONS ONS ONS ONS 0 Operating Lease 0 Finance Lease 0x Finance Lease 0 Ljóddng
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Classifying Leases
The following separate scenarios relate to a 5-year lease, pertaining to equipment with a fair value of $25,000. Assume in all scenarios that payments are made at the
beginning of the period.
1. Lease payments include a fixed payment of $5,000 per year.
2. Lease payments include a fixed payment of $5,000 per year, plus $250 for insurance and $300 for a maintenance contract.
3. Lease payments will be $5,000 in the first year and will increase by 3% (calculated on the previous year's payment) for each of the following 4 years.
4. Lease payments will be $5,000 in the first year and will increase each of the following years by the increase in the CPI from the preceding year. The current CPI is 120
and is expected to increase to 122 at the end of the next year.
5. Lease payments will be $5,000 in the first year and will increase each of the following years by (a) the increase in the CPI from the preceding year, or (b) 3%, whichever
is greater. The current CPI is 120 and is expected to increase to 122 at the end of the next year.
6. Lease payments include a fixed payment of $5,000 per year. In addition, the lessee has guaranteed the residual value of the equipment for $1,000 at the end of the
lease.
Required
For each of the six separate scenarios outlined above, and considering only the fair value lease criterion, determine how the lessee would classify the lease, assuming a
discount rate of 7%.
Note: Round amounts in table to the nearest whole dollar.
PV of Lease Payments 90% of Fair Value Lease Classification
15
0x Operating Lease
25
0x Finance Lease
35
45
5$
6 $
0x1
oxs
ONS
0x s
ONS
0x1
0x Finance Lease
0x Operating Lease
0x Finance Lease
0x Finance Lease
0
#
0
#
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