Pat Delaney Company leases an automobile with a fair value of $13,060 from John
ID: 2454795 • Letter: P
Question
Pat Delaney Company leases an automobile with a fair value of $13,060 from John Simon Motors, Inc., on the following terms.
1.
Noncancelable term of 54 months.
2.
Rental of $280 per month (at end of each month). (The present value at 1% per month is $11,639.)
3.
Estimated residual value after 54 months is $1,000. (The present value at 1% per month is $584.) Delaney Company guarantees the residual value of $1,000.
4.
Estimated economic life of the automobile is 58 months.
5.
Delaney Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown.
What is the present value of the minimum lease payments?
(c) Record the lease on Delaney Company’s books at the date of inception. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
(d) Record the first month’s depreciation on Delaney Company’s books (assume straight-line). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 15.)
(e) Record the first month’s lease payment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 15.)
1.
Noncancelable term of 54 months.
2.
Rental of $280 per month (at end of each month). (The present value at 1% per month is $11,639.)
3.
Estimated residual value after 54 months is $1,000. (The present value at 1% per month is $584.) Delaney Company guarantees the residual value of $1,000.
4.
Estimated economic life of the automobile is 58 months.
5.
Delaney Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown.
Explanation / Answer
Present Value of monthly lease rental = $ 11639
Present Value of Guaranteed Residual Value ( GRV ) = $ 584
Present Value of Minimum Lease Payments = Present value of monthly lease rental + Present value of GRV
= $11639 + $ 584
= $ 12223
c) The present value of minimum lease payments being 93.59 % ($12223/$13060) of the fair value, i.e. being a substantial portion thereof, the lease constitutes a finance lease. Present value of minimum lease payment ( MLP )= $ 12223 Fair Value of machine = $ 13060
A finance lease is capitalised at fair value or PV of MLP if that is lower than fair value. Since is Pv of PLP is lower than Fair value .
Value of Machine at the date of inception = $ 12223
Journal entry
Automobile on Lease A/c Dr. $12223 To Johan Simon Motors A/c Cr. $12223
( Being Asset recorded )
d) Depreciation per Month = (Value of Machine - Estimated residual Value ) / life of asset = ( $12223-$ 1000) / 58 = $193.5
Journal enrty
Depreciation A/c Dr. 193.5 To Automobile on lease A/c Cr. 193.5
( Being Depreciation recorded)
e) Johan Simon Motors A/c Dr. $ 158 Interest ( $ 12223 * 1%) Dr. 122 To Bank A/c Cr. Cr. $ 280 (Being lease rental paid )