Each of the three independent situations below describes a capital lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit rate of return.
|
Situation |
|
|
|
1 |
2 |
3 |
| Lease term (years) |
10 |
20 |
4 |
| Lessor's rate of return (known by lessee) |
11% |
9% |
12% |
| Lessee's incremental borrowing rate |
12% |
10% |
11% |
| Fair value of leased asset |
$600,000 |
$980,000 |
$185,000 |
|
a. Determine the amount of the annual lease payments as calculated by the lessor and a lease liability for above situations.
b. Determine the amount of the annual lease payments as calculated by the amount the lessee would record as a leased asset and a lease liability for above situations.