This is a variation of E 15–9 modified to assume lease payments are at the end of each period.

Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the end of each year. The lessee is aware of the lessor’s implicit rate of return. 

Required: 

For each situation, determine: 

a. The amount of the annual lease payments as calculated by the lessor. 

b. The amount the lessee would record as a right-of-use asset and a lease liability.

Situation 1 2 3 Lease term (years) 10 20 4 Lessor's rate of return 11% 9% 12% Lessee's incremental borrowing rate 12% 10% 10% Fair value of lease asset $600,000 $980,000 $185,000