1 answer

On January 1, James Industries leased equipment to a customer for a four-year period, at which...

Question:

On January 1, James Industries leased equipment to a customer for a four-year period, at which time possession of the leased
On January 1, James Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $720,000 and has an expected useful life of six years. Its normal sales price is $720,000. The residual value after four years is $120,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 5% (FV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Calculate the amount of the annual lease payments. (Round your answers to the nearest whole number.) Answer is complete but not entirely correct. Guaranteed Residual Value Table or calculator function PV of $1 Amount to be recovered (fair value) Guaranteed residual value Amount to be recovered through periodic lease payments Present value 720,000 98.724 621,276 Lease Payment Table or calculator function PVA of $1 Amount of fair value recovered each lease payment Lease Payments 2 203.014

Answers

Guaranteed Residual Value

Table or Calculator function:

PV of $1

=                                                                                                                 n

4

=                                                                                                                 i

5%

Present Value

Amount to be recovered (fair value)

$720000

Guaranteed residual Value

$98724

      Amount to be recovered through periodic lease paymets

$621276

Lease Payment

Table or Calculator function:

PVA of $1

=                                                                                                                 n

4

=                                                                                                                 i

5%

Amount of Fair Value recovered each lease payment

Lease Payments

$175207

Amount of Fair Value recovered each lease payment = $621276/PVA (4,5%)

                                            = $621276/3.54595 = $175207

.

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