Pat Delaney Company leases an automoble with a fair value of $16,660 from John S
ID: 2461443 • Letter: P
Question
Pat Delaney Company leases an automoble with a fair value of $16,660 from John Simon Motors, Inc.on the following terms:
1. Nonconcealable term of 56 months.
2. Rental of $370 per month (at the end of each month). (The present value at 1% per month is $15,806).
3. Estimated residual value after 56 months is $1180 (The present value at 1% per month is $676). Delaney Company guarantees the residual value of $1180.
4. Estimated economic life of the automobile is 66 months.
5. Delaney Company's incremental borrowing rate is 12% ayear (1% a month). Simon's implicit rate is unknown.
Questions:
a) What is the present value of the minimum lease payments?
b) Record the lease on Delaney Company's book at the date of inception.
c) Record the first month's depreciation on Delaney Company's books (Assume straight-line).
d) Record the first month's lease payment.
Pat Delaney Company leases an automobile with a fair value of $16,660 from John Simon Motors, Inc on the following terms: Nonconcealable term of 56 months. Rental of $370 per month (at the end of each month). (The present value at 1% per month is $15,806). Estimated residual value after 56 months is $1180 (The present value at 1% per month is $676). Delaney Company guarantees the residual value of $1180. Estimated economic life of the automobile is 66 months. 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? Record the lease on Delaney Company's book at the date of inception. Record the first month's depreciation on Delaney Company's books (Assume straight-line). Record the first month's lease payment.Explanation / Answer
Ans 1 Present Value of Minimum Lease payment Present value of minimum rental payments $15,806 Present Value of Guarnteed Residual Value 676 Ans 1 Present Value of Minimum Lease payment $16,482 Ans 2 Account Title Dr Cr Lease Equipment $16,482 Leased Liability $16,482 (being the recording at the inception with minimumlease payments) Ans c First month depreciation Dr Cr Depreciation Expense-Equipment 273.25 Accumulated Depreciation-Equipment 273.25 (16482-1180)/56 Ans d First Month lease payment Lease Liability $205 Interest (16482*1%) $165 Cash 370 (being interest debited by 1% on MLP and cash is paid so credited and the difference is dr. with lease liability)