The following separate scenarios relate to a 5-year lease for equipment with a fair value of $55,000. Assume in all scenarios that payments are made at the beginning of the period.

1) Lease payments include a fixed payment of $11,000 per year.

2) Lease payments include a fixed payment of $11,000 per year, plus $550 for insurance and $660 for a maintenance contract.

3) Lease payments will be $11,000 in the first year and will increase by 3% (calculated on the previous year’s payment) for each of the following 4 years.

4) Lease payments will be $11,000 in the first year and will increase each of the following years by the increase in the CPI from the preceding year. The current CPI is 120 and is expected to increase to 122 at the end of the next year.

5) Lease payments will be $11,000 in the first year and will increase each of the following years by (a) the increase in the CPI from the preceding year, or (b) 3%, whichever is greater. The current CPI is 120 and is expected to increase to 122 at the end of the next year.

6) Lease payments include a fixed payment of $11,000 per year. In addition, the lessee has guaranteed the residual value of the equipment for $2,200 at the end of the lease.

For each of the six separate scenarios outlined above, and considering only the fair value lease criterion, determine how the lessee would classify the lease, assuming a discount rate of 7%. Round amounts in table to the nearest whole dollar. Include all formulas to show work.

Answer rating: 100% (QA)

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