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Leases Day 1 Classification Model (Homework Part 1)

1. Larson and Budd entered into a 5-year lease agreement on January 1, 20X1.  Larson will
pay Budd annual lease payments of $1,000 at the beginning of each lease period.  Title
will transfer to Larson at the end of the 5-year lease agreement.  The leased asset is not
specialized in nature.  The asset has a remaining economic life of 10 years.  The implicit
rate (which is known) is 10% and the Fair Value of the asset is $10,000. 
Document your work as you answer the questions in the module:

(Circle one)
Lessee or Lessor

5 criteria test P/Y =


Title Transfer? Y/N Beg / End
Specialized asset? Y/N N=
Bargain purchase option? Y/N i=
Economic life? Lease term life 5 Asset life 10 Y / N PMT =
Guaranteed Residual Value? No / Lessee / Third Party FV =
PV of Payments _______ FV of asset _______ Y / N PV = ??? = 4170

(Circle one)
Operating Financing

2. Larson leases a piece of equipment from Budd for a period of 5 years.  Annual lease
payments of $1,000 are due at the end of lease period. The leased asset was designed
specifically for Larson's use and is specialized in nature. The asset has a remaining
economic life of 7 years.  The implicit rate (which is known) is 10% and the Fair Value
of the asset is $4,300.
Document your work as you answer the questions in the module:

(Circle one)
Lessee or Lessor

5 criteria test
Title Transfer? Y/N P/Y =
Specialized asset? Y/N Beg / End
Bargain purchase option? Y/N N=
i=
Economic life? Lease term life ____ Asset life ____ Y / N
PMT =
Guaranteed Residual Value? No / Lessee / Third Party FV =
PV of Payments _______ FV of asset _______ Y / N PV = ??? = 3791

(Circle one)
Operating Financing
3. Larson leases a piece of equipment from Budd for a period of 5 years.  Lease payments of
$1,000 at due at the beginning of the annual leasing period. At the end of the lease
agreement, Larson has the option to purchase the equipment for $1.  The leased asset is
not specialized in nature. The asset has a remaining economic life of 10 years.  The
implicit rate (which is known) is 10% and the Fair Value of the asset is $10,000.
Document your work as you answer the questions in the module:

(Circle one)
Lessee or Lessor

5 criteria test
Title Transfer? Y/N P/Y =
Specialized asset? Y/N Beg / End
Bargain purchase option? Y/N N=
i=
Economic life? Lease term life ____ Asset life ____ Y / N
PMT =
Guaranteed Residual Value? No / Lessee / Third Party FV =
PV of Payments _______ FV of asset _______ Y / N PV = ??? = 4170

(Circle one)
Operating Financing

4. Larson leases a piece of equipment from Budd for a period of 5 years.  Annual lease
payments of $1,500 at due at the end of lease period. The leased asset was not specialized
in nature. The asset has a remaining economic life of 5 years. The implicit rate (which is
known) is 11% and the Fair Value of the asset is $5,550.
Document your work as you answer the questions in the module:

(Circle one)
Lessee or Lessor

5 criteria test
Title Transfer? Y/N P/Y =
Specialized asset? Y/N Beg / End
Bargain purchase option? Y/N N=
i=
Economic life? Lease term life ____ Asset life ____ Y / N
PMT =
Guaranteed Residual Value? No / Lessee / Third Party FV =
PV of Payments _______ FV of asset _______ Y / N PV = ??? = 5544

(Circle one)
Operating Financing
5. Larson leases a piece of equipment from Budd for a period of 5 years.  Lease payments of
$1,000 at due at the beginning of the annual leasing period. The leased asset is not
specialized in nature. The asset has a remaining economic life of 7 years.  The implicit
rate (which is known) is 10% and the Fair Value of the asset is $4,600.  What type of
lease is this for Larson?
Document your work as you answer the questions in the module:

(Circle one)
Lessee or Lessor

5 criteria test
Title Transfer? Y/N P/Y =
Specialized asset? Y/N Beg / End
Bargain purchase option? Y/N N=
i=
Economic life? Lease term life ____ Asset life ____ Y / N
PMT =
Guaranteed Residual Value? No / Lessee / Third Party FV =
PV of Payments _______ FV of asset _______ Y / N PV = ??? = 4170

(Circle one)
Operating Financing Direct Financing

6. Larson and Budd entered into a 10-year lease agreement on January 1, 20X1.  Larson will
pay Budd annual lease payments of $5,000 at the beginning of each lease period.  The
leased asset is not specialized in nature and will revert back to Budd at the end of the
lease.  The asset has a remaining economic life of 15 years.  The implicit rate (which is
known) is 12% and the Fair Value of the asset is $40,000. 
Document your work as you answer the questions in the module:

(Circle one)
Lessee or Lessor

5 criteria test
Title Transfer? Y/N P/Y =
Specialized asset? Y/N Beg / End
Bargain purchase option? Y/N N=
i=
Economic life? Lease term life ____ Asset life ____ Y / N
PMT =
Guaranteed Residual Value? No / Lessee / Third Party FV =
PV of Payments _______ FV of asset _______ Y / N PV = ??? = 31641

(Circle one)
Operating Financing