The following separate scenarios relate to a 5-year lease,pertaining to equipment with a fair value of $25,000. Assume in allscenarios that payments are made at the beginning of theperiod.
1. Lease payments include a fixed payment of $5,000 peryear.
2. Lease payments include a fixed payment of $5,000 per year,plus $250 for insurance and $300 for a maintenance contract.
3. Lease payments will be $5,000 in the first year and willincrease by 3% (calculated on the previous year's payment) for eachof the following 4 years.
4. Lease payments will be $5,000 in the first year and willincrease each of the following years by the increase in the CPIfrom the preceding year. The current CPI is 120 and is expected toincrease to 122 at the end of the next year.
5. Lease payments will be $5,000 in the first year and willincrease each of the following years by (a) the increase in the CPIfrom the preceding year, or (b) 3%, whichever is greater. Thecurrent CPI is 120 and is expected to increase to 122 at the end ofthe next year.
6. Lease payments include a fixed payment of $5,000 per year. Inaddition, the lessee has guaranteed the residual value of theequipment for $1,000 at the end of the lease.
Required
For each of the six separate scenarios outlined above, andconsidering only the fair value lease criterion, determine how thelessee would classify the lease, assuming a discount rate of7%.
| PV of Lease Payments | 90% of Fair Value | Lease Classification |
|---|
| 1 | | | |
| 2 | | | |
| 3 | | | |
| 4 | | | |
| 5 | | | |
| 6 | | | |
