1 2 3 4

A. The lessor’s:

1. Minimum lease payments¹ $700,000 $750,000 $800,000 $840,000

2. Gross investment in the lease² 700,000 750,000 850,000 900,000

3. Net investment in the lease³ 548,592 547,137 610,168 596,764

B. The lessee’s:

4. Minimum lease payments⁴ 700,000 750,000 800,000 840,000

5. Leased asset⁵ 548,592 547,137 586,842 572,531

6. Lease liability⁶ 548,592 547,137 586,842 572,531

¹ ($100,000 x number of payments) + residual value guaranteed by lessee and/or by third party; for situation 4: ($100,000 x 8) + ($40,000).

² Minimum lease payments plus unguaranteed residual value; for situation 4: ($840,000 + $60,000).

³ Present value of gross investment (discounted at lessor’s rate); for situation 4: ($100,000 x 5.56376) + ($100,000 x .40388).

⁴ ($100,000 x number of payments) + residual value guaranteed by lessee; for situation 4: ($100,000 x 8) + $40,000.

⁵ Present value of minimum lease payments (discounted at lower of lessor’s rate and lessee’s incremental borrowing rate); should not exceed fair value; for situation 4: ($100,000 x 5.56376) + ($40,000 x .40388).

⁶ Present value of minimum lease payments (discounted at lower of lessor’s rate and lessee’s incremental borrowing rate); should not exceed fair value; for situation 4: ($100,000 x 5.56376) + ($40,000 x .40388).

Exercise 15-16

Situation 1 Amount to be recovered (fair value) $60,000 Less: Present value of the BPO price ($10,000 x .56743^*) (5,674)

Amount to be recovered through periodic lease payments $54,326

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Lease payments at the beginning 

of each of the next 5 years: ($54,326 ÷ 4.03735^**) $13,456

^* present value of $1: n=5, i=12%

^** present value of an annuity due of $1: n=5, i=12%

Situation 2 Amount to be recovered (fair value) $420,000 Less: Present value of the BPO price ($50,000 x .59345^*) (29,673)

Amount to be recovered through periodic lease payments $390,327

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Lease payments at the beginning 

of each of the next 5 years: ($390,327 ÷ 4.10245^**) $95,145

^* present value of $1: n=5, i=11%

^** present value of an annuity due of $1: n=5, i=11%

Note: Since a BPO is expected to be exercised, the lease term ends for accounting purposes when the option becomes exercisable.

Exercise 15-16 (concluded)

Situation 3 Amount to be recovered (fair value) $185,000 Less: Present value of the BPO price ($22,000 x .77218^*) (16,988)

Amount to be recovered through periodic lease payments $168,012

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Lease payments at the beginning 

of each of the next 3 years: ($168,012 ÷ 2.75911^**) $60,894

^* present value of $1: n=3, i=9%

^** present value of an annuity due of $1: n=3, i=9%

Note: Since a BPO is expected to be exercised, the lease term ends for accounting purposes when the option becomes exercisable.

Exercise 15-17

Requirement 1

Note:

Because exercise of the option appears at the inception of the lease to be reasonably assured, payment of the option price ($45,000) is expected to occur when the option becomes exercisable (at the end of the third year).

Present value of annual lease payments ($36,000 x 2.69005^**) $ 96,842

Plus: Present value of the BPO price ($45,000 x .71178^*) 32,030

Present value of minimum lease payments $128,872

^* present value of $1: n=3, i=12%

^** present value of an annuity due of $1: n=3, i=12%

Requirement 2