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 1. Lease payments include a faed 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 CP from the preceding year. The current CPI is 120 and is expected to increase to 122 at the end of the next year. S. Lease payments will be $5,000 in the first year and will increase each of the following years by (a) the increase in the CP 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
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 1. Lease payments include a faed 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 CP from the preceding year. The current CPI is 120 and is expected to increase to 122 at the end of the next year. S. Lease payments will be $5,000 in the first year and will increase each of the following years by (a) the increase in the CP 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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Hello, I am just looking for the correct answer for the 2 wrong answers. Thank you
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 faxed 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.
S. 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
21,936 11
24349 xs
Lease Classification
Operating Lease
Finance Lease
23,199 S
Finance Lease
22.629 $
23.1995
22,649
15
25
SSSS-
-SAEIM
35
22.500
22.500
22.500
Operating Lease
22.500
22.500
22.500 Finance Lease
Finite Lease
.
#
#
#
✔
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