Question

A Lessee insists on structuring a lease that will have the easier accounting result of an operating lease - that is, equal annual lease payments expensed as equal annual expenses.

The equipment leased is an old Boeing 747. The Lessee is a Private Air Cargo company operating exclussively in the US. The Annual Lease Expense will be 10,000,000
The lease must be made at the beginning of each year. The lease term is four years. The lessor's implied rate is not known. As a result the lessee substitiutes its "incremental borrowing rate" for similar collateralized borrowings. The lessee's incremental borrowing rate is estimated to be 12%
estimate present values of the lease payments

Answer 1

Lessee insists on structuring a lease that will have the easier accounting result of an operating lease - that is, equal annual lease payments expensed as equal annual expenses.

The equipment leased is an old Boeing 747. The Lessee is a Private Air Cargo company operating exclusively in the US. The Annual Lease Expense will be 10,000,000The lease must be made at the beginning of each year. The lease term is four years. The lessor's implied rate is not known.

As a result the lessee substitutes its "incremental borrowing rate" for similar collateralized borrowings. The lessee's incremental borrowing rate is estimated to be 12%.We need to estimate the present values of the lease payments. The formula for the present value of an annuity is PV =
`PMT [(1 - (1 / (1 + i) ^ n)) / i]` PV = present value PMT = periodic paymenti = interest raten = number of payments.

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