[Silent]

Can someone explain this answer. I am confused how they actually got it.

“An asset with a market value of $125,000 and a cost of $110,000 is leased on 1/1/x1. The lease is a sales-type lease for the lessor. Five annual lease payments are due on December 31 beginning on 12/31/x1. The asset will have no residual value. The lessor sets a rate of return of 6%.
Present value factor of an ordinary annuity for five years at 6% 4.21236
Present value factor of an annuity due for five years at 6% 4.46511
Present value factor of a single sum for a five-year term at 6% .74726
What amount will the lessor charge the lessee in annual lease payments?
A. $27,995
B. $29,675
C. $93,408
D. $25,000
This Answer is Correct
Correct! The lessor’s calculation of the lease payment is $125,000 = lease payment × (PV factor of an ordinary annuity for 5 years at 6%). $125,000 = lease payment × 4.21236. Lease payments will be $29,675 each.”

If you take pv of ordinary annuity you do not get 29.675. When you multiply 125000*4.21236 you get 526545. What am I missing?

[Mercenary]

125,000 = X * 4.21236
So 125,000 / 4.21236 = X
X = $29.675

[AusNat]

They're asking you to solve for the lease payments. Often, if given the lease payments (the annuity payments) and the relevant present value factor, you would calculate the amount to record the fair value of the lease receivable at by finding the present value of the annuity. This is done my multiplying the individual lease payment amount by the present value factor. But in this one, they gave you the fair value of the lease and the PV factor, and you need to solve for the missing variable in your equation – the annual lease payments. Accountants may not all love math, but we do have to use a ton of basic algebra.

Annuity Payment X PV factor = FV of annuity
Annuity Payment X 4.21236 = $125,000
Annuity Payment = $125,000/4.21236
Annuity Payment = $29,675

You could then check the answer by multiplying that yearly lease payment you just found by the present value factor – $29,675 X 4.21236 = $125,000

[Silent]

Thank you both reply, now i feel stupid for not realizing this 😀

[Author]

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