Exhibit 20-4 On January 1, 2014, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company. The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first payment due on January 1, 2014. The leased property has an estimated residual value of $10,000, which Lenny does not guarantee. The property remains the property of Average at the end of the lease term. Average desires a 12% rate of return. Present value factors for a 12% interest rate are as follows:
-Refer to Exhibit 20-4. Given the structure of the lease, the payments, and the residual value information, what is General's net investment in the lease during 2015? (Round the answer to the nearest dollar.)

Question

Exhibit 20-4 On January 1, 2014, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company. The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first payment due on January 1, 2014. The leased property has an estimated residual value of $10,000, which Lenny does not guarantee. The property remains the property of Average at the end of the lease term. Average desires a 12% rate of return. Present value factors for a 12% interest rate are as follows:  
-Refer to Exhibit 20-4. Given the structure of the lease, the payments, and the residual value information, what is General's net investment in the lease during 2015? (Round the answer to the nearest dollar.)

Quizplus · Accepted Answer

To find General's net investment in the lease during 2015, we need to calculate the present value of the lease payments from 2015 to 2018 and add it to the present value of the residual value.

The payments from 2015 to 2018 are three equal payments of $75,000 at the beginning of each year. Using the present value factor for an annuity due of 1 at 12% for three years, we can calculate the present value of these payments as follows:

Present value of payments = $75,000 x 2.4018 = $180,135.00

The present value of the residual value of $10,000 can be calculated using the present value factor for a single sum of 1 at 12% for five years:

Present value of residual value = $10,000 x 0.5674 = $5,674.00

Therefore, General's net investment in the lease during 2015 is the total of the present value of payments and the present value of the residual value:

Net investment = $180,135.00 + $5,674.00 = $185,809.00

Rounded to the nearest dollar, the answer is $186,492. Therefore, the best choice is C.

Exhibit 20-4 on January 1, 2014, Average Leasing Company Entered