A lessor and lessee enter into a lease agreement with the following characteristics: Inception: 1/1/x0 annual lease payments of $10,000 are due each Jan.1 beginning1/1/x0
End of lease term: 12/31/x5
Book value of equipment under lease,at inception: $35,000
Market value of equipment under lease,at inception: $50,000
Remaining useful life of equipment at inception: 9 yrs
Expected residual value at end of lease term: $4,000
Interest rate used by lessor and lessee: 10%
Assuming the lessor will capitalize this lease,what is the amount of the net lease receivable for the lessor,before the first payment is made?

Question

Quizplus · Accepted Answer

To calculate the net lease receivable for the lessor, we need to first calculate the present value of the minimum lease payments.

Step 1: Calculate the total lease payments over the lease term. 
Annual lease payments = $10,000 
Number of lease payments = 6 (since lease term is 6 years) 
Total lease payments = $10,000 x 6 = $60,000

Step 2: Calculate the present value factor 
The interest rate used by both parties is 10%. Since the lease payments are made at the start of each year, we can use the formula for present value of an annuity due.

Using a financial calculator or Excel, the present value factor for an annuity due of $1 for 6 years at 10% is 4.868.

Step 3: Calculate the present value of minimum lease payments. 
Present value of minimum lease payments = Total lease payments x Present value factor 
= $60,000 x 4.868 
= $292,080

Step 4: Calculate the estimated residual value 
As per the lease agreement, the estimated residual value at the end of the lease term is $4,000.

Step 5: Calculate the book value of the equipment at the end of the lease term 
The initial book value of the equipment at inception is $35,000. With an estimated useful life of 9 years, the annual depreciation is $35,000/9 = $3,889. 
Book value of equipment at end of lease term = $35,000 - ($3,889 x 6) = $11,767

Step 6: Calculate the net lease receivable 
Net lease receivable = Present value of minimum lease payments + Estimated residual value - Book value of equipment at end of lease term 
= $292,080 + $4,000 - $11,767 
= $284,313

Therefore, the answer is D.

A Lessor and Lessee Enter into a Lease Agreement with the Following