Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the end of each year. The lessee is aware of the lessor's implicit rate of return.
Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Situation
1 2 3
Lease term (years) 11 15 6
Lessor's rate of return (known by lessee) 10% 8% 11%
Lessee's incremental borrowing rate 11% 9% 10%
Fair value of lease asset $640,000 $1,000,000 $205,000
Required:
a. & b. Determine the amount of the annual lease payments as calculated by the lessor and the amount the lessee would record as a right-of-use asset and a lease liability, for each of the above situations.