Problem:
Below are three independent lease scenarios. Payments are made at the end of each year.
Case1 Case2 Case3
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Cost of equipment to lessor $50,000 $64,000 $100,000
Fair value of equipment $70,000 $80,000 $100,000
Guaranteed residual value $10,000
Unguaranteed residual value $8,000
Bargain purchase option $4,500
life of lease 10 years 15 years 8 years
Economic life of asset 12 years 16 years 10 years
Rate Of return required 12% 9% 7%
Required:
1. Calculate the lease payments for the above three cases.
2. Based on the relation between the lease life and economic life, the lessees will classify the leases as capital leases. For each lease, compute the lessee’s depreciation expense for the first year of the lease. Assume the use of the straight-line method and no salvage value at the end of the economic life.