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A lessor and lessee enter into a lease agreement whereby an $18$ wheeler with a fair value of $$130,000$ and a useful life of five years will be leased for a period of four years. The lease payments will be made at the beginning of each year. The residual value at the end of the lease term is expected to be $$20,000.$ The residual value at the end of the asset's useful life is expected to be $$15,000.$ At the end of two years the lessee has the option to purchase the truck for $65,000.$ The fair market value of the truck at that time is estimated to be $90,000.$ The lessor requires a rate of return of $12\%$ on hls net investment. The lessee can borrow to purchase the truck at a $10\%$ interest rate. The lessee knows the lessor's implicit rate.

The amount of the annual lease payments is

$130,000=R1\mathrm{.}8929+65,0000\mathrm{.}7972$

$R=41,303$

List and describe the amounts included in the lease payments $+$ guaranteed salvage value.

$\backslash$table$[[$RENT$,41,303],[$BARGAIN PURCHASE OPTION,$5],[$GUARANTEED SALVAGE VALUE,$65,000]]$

Calculate the present value of the lease payments for the lessee

$\backslash$table$[[$Lease Payment,Amount,PV Factor,Present Value$],[$Rent$,41,303,1\mathrm{.}8929,78,182],[$Bargain purchase option,$65,000,0\mathrm{.}7972,51,818],[,$Total,,$130,000]]$

Is the total at least $90\%$ of fair value?

YES

or

NO

$130,00090\%130,000$

$130,000117,000$

$\backslash$table$[[3.$ Indicate which lease criteria are met.,$],[,$LESSEE$],[$TRANSFER OF OWNERSHIP,no$],[$BARGAIN PURCHASE OWNER,yes$],[$LEASE TERM $>=75\%$ OF LIFE,yes$],[$PV OF MLP $>=90\%$ OF FMV$,$yes$],[$Specialized asset,No$]]$

$\frac{4}{5}=80\%75\%$

What kind of lease is this for the lessee $($why$)?$ FINANCE LEASE OR OPERATING LEASE

Complete this exercise as described below at home and turn it in for a grade next class period

For the lessee,

The capitalized value of the lease is

The beginning carrying value of the liability is

The interest rate to calculate interest is

Make the journal entries for the first year of the lech term.

LEASED TRUCK

CASH

LEASE LIABILITY

INTEREST EXPENSE

INTEREST PAYABLE

AMORTIZATION EXPENSE

ACCUM AMORTIZATION

Make all lessee journal entries for the rest of the lease term.

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