Gamma Leasing acquires equipment and leases it to customers under long-term sales-type leases. Gamma earns interest under these arrangements at a 6% annual rate. Gamma purchased a machine and then leased it for $300,000 under an arrangement that specified annual payments to be received for five years, beginning at the commencement of the lease. The lessee had the option to purchase the machine at the end of the lease term for $50,000 when it was expected to have a residual value of $80,000. Calculate the amount of the annual lease payments. (Round your answer to the nearest whole dollar amount.) The present value of $1: n = 5, i = 6% is 0.74726.
The present value of an ordinary annuity of $1: n = 5, i = 6% is 4.21236.
The present value of an annuity due of $1: n = 5, i = 6% is 4.46511.

Question

Quizplus · Accepted Answer

A purchase option is a provision in a lease contract that gives the lessee the option of purchasing the leased property at a specified exercise price. If that price is sufficiently lower than the expected fair value of the property when the option becomes exercisable that the exercise of the option appears "reasonably certain" at the beginning of the lease, transfer of ownership is expected and the lease would be considered a finance lease.
Also, the exercise price would be part of the lease payments for both the lessee and lessor, influencing the amount recorded as a right-of-use asset, lease payable, and lease receivable. Furthermore, the lease term would be considered as ending at the time the option becomes exercisable. 11ea937b_35e6_0a04_a419_197cfc4e1a5a_TB2599_00 * present value of $1: n = 5, i = 6%
** present value of an annuity due of $1: n = 5, i = 6%

Gamma Leasing Acquires Equipment and Leases It to Customers Under