CMA Study Group

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  • 1.  Lease Question

    Posted 01-27-2020 01:43 PM
    Can someone help me calculate the present value on a lease? See the information below.  

    January 1, company A (Lessor) leases a car to Company B (lessee) for 5 years with annual payments of $2,000 due at time of signing and annually beginning on December 31 thereafter.
    The useful life of the car is 10 years.
    There is no bargain purchase option available to Company B. 
    There is no automatic title transfer to Company B at lease term
    The fair value of the care at the time of lease signing is $9,000.
    Company B incremental borrowing rate is 8% and the rate implicit in the lease is not known to Company B. 

    The example in the study guide says the present value is $8,624 can someone help me get to this figure? 

    Thanks.

    ------------------------------
    SARAH ELEDGE
    Accountant
    Chattanooga TN
    United States
    ------------------------------


  • 2.  RE: Lease Question

    Posted 01-27-2020 01:56 PM
    Hi Sarah-

    The key is when you calculate the PV in your calculator you enter

    N=4
    I=8
    PMT=-2,000

    The PV is $6,624.25 for future lease payments.  Then you add the $2,000 for the payment you make at the beginning of the lease(at time 0) for a total of $8,624.

    Hope this helps.
    --
    Sincerely,


    Christopher G. Concepcion





  • 3.  RE: Lease Question

    Posted 01-28-2020 07:54 AM
    Will we be given the PV tables on the actual exam?

    ------------------------------
    Bradley Kilbreth
    Student
    Manchester NH
    United States
    ------------------------------



  • 4.  RE: Lease Question

    Posted 01-29-2020 07:57 AM
    Thank you for your reply Bradley.

    ------------------------------
    SARAH ELEDGE
    Accountant
    Chattanooga TN
    United States
    ------------------------------



  • 5.  RE: Lease Question

    Posted 01-29-2020 07:58 AM
    Thank you for your reply, Bradley.

    ------------------------------
    SARAH ELEDGE
    Accountant
    Chattanooga TN
    United States
    ------------------------------



  • 6.  RE: Lease Question

    Posted 01-27-2020 02:14 PM
    Hi Sarah,

    The first payment is $2,000 and you need to add and calculate the PV of the annuity payments ($2,000 x 4 periods).
    I copied a table from a website, https://accountinginfo.com/study/pv/table-pv-a-01.pdf (the problem should have given you these numbers I believe)
    image.png

    So you have a payment due at the END of 4 periods (use ordinary annuity table).
    Look at the 8% column and 4 periods row...
    $2,000 * 3.3121 = $6,624.20 + the $2,000 = $8,624.20

    Rebecca