Exercise on Calculation of Fair Value -The Case of Sunrise Corporation

Lease rent per year 100000

Discount rate 16%
Lease term (period) 3 years
Residual value 17000
Fair value = ALR/(1+r)1+ALR/(1+r)2+…+ALR/(1+r)n+RV/(1+r)n
Where: ALR=Annual lease rental, RV=Residual value, n=Lease period
and r is the finance charge (interest/discount rate implicit in the lease
Calculations 1 2 3 3
100000 100000 100000 17000
Fair Value 235480 86207 74316 64066 10891
Exercise-The Case of Sunrise Corporation
Calculation for apportionment of finance charge and the reduction of the outstanding liability
Lease rent per year 100000
Discount rate 16%
Lease term (period) 3 years
Residual value 17000

Reduction in
Finance Payment o/s liability o/s liability
Year Charge (Rs) (Rs) (Rs) (Rs)
Jan 1 235480
1 Dec 31 37677 100000 62323 173157
2 Dec 31 27705 100000 72295 100862
3 Dec 31 16138 100000 83862 17000