Question

Exercise 21A-3 a-g Metlock Company leases an automobile with a fair value of $11,845 from John Simon Motors, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $240 per month (at the beginning of each month). (The present value at 0.5% per month is $10,648.) 3. Metlock guarantees a residual value of $1,240 (the present value at 0.5% per month is $966). Metlock expects the probable residual value to be $1,240 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Metlock’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

What is the present value of the lease payments to determine the lease liability? (Round answer to 0 decimal places, e.g. 5,275.) Your answer is partially correct. Try again. Based on the original fact pattern, record the lease on Metlock’s books at the date of commencement. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Record the first month’s lease payment (at commencement of the lease). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.) Record the second 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. 5,275.) Record the first month’s amortization on Metlock’s books (assume straight-line). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.25.) Suppose that instead of $1,240, Metlock expects the residual value to be only $500 (the guaranteed amount is still $1,240). How does the calculation of the present value of the lease payments change from part (b)? (Round answer to 0 decimal places, e.g. 5,275.) PV of lease payments $

Answer 1

A PV of lease payments 1 Monthly Payments of $240 for 50 months Add Residual value of $1,240 PV of lease payments $10,648 2 $966 3 $11,614 4 5 Rental per month Residual value $240 6 $1,240 7 0.50% 8 Interest rate No. of months 50 9 10 PV of lease payments 11 PV of lease payments $11,614 =PV (0.5 % ,50 -240,-1240,1) 12 13 Life of asset (months) 14 Amortization Expense 60 $173 15

D E G Н K Amortization Table Amortization Table 1 RentalPer Interest Year Rental Per Interest 2 Year Reduction in Lease Reduction in Lease @ 0.5% Lease Liability Liability $11,614 $240 $11,374 $183 $11,190 $184 $11,006 $185 $10,821 $186 $10,636 $187 $10,449 $188 $10,261 $189 $10,072 $9,883 $9,692 $9,500 $9,308 $9,115 $8,920 $8,725 $8,528 $8,331 $8,133 $7,933 $7,733 $7,532 $7,329 $7,126 $6,922 $6,716 @ 0.5% Lease Liability Liability Month Month $240 $34 $6,510 $207 0 26 $206 4 $240 $0 $240 $33 $6,302 $208 $6,094 $210 $5,884 27 $240 $57 $240 $32 2 28 6 $240 $56 $240 $30 3 29 7 $240 $55 30 $240 $29 $211 $5,674 8 4 $212 $5,462 $240 $54 $240 $28 5 31 $240 $53 $240 $27 $5,249 $5,036 $215 $4,821 $216 $4,605 $217 $4,388 $4,170 $3,951 $3,730 $3,509 $3,287 $224 $3,063 $213 6 32 10 $240 $52 $240 $26 $214 11 7 33 $240 $51 $240 $25 8 34 12 $240 $50 $190 $240 $24 35 13 $240 $49 $191 $240 $23 14 10 36 $240 $48 $192 $240 $22 $218 11 37 15 $240 $48 $192 $240 $21 $219 12 38 16 $240 $47 $193 $240 $20 $220 13 39 17 $240 $46 $194 $240 $19 $221 14 40 18 $240 $45 $195 $240 $18 $222 15 41 19 $240 $44 $196 $240 $16 16 42 20 $225 $2,838 $240 $43 $197 $240 $15 17 43 21 $240 $42 $198 $240 $14 $226 $2,613 18 44 22 $227 $2,386 $240 $41 $199 $240 $13 19 45 23 $240 $40 $200 $240 $12 $228 $2,158 20 46 24 $240 $39 $201 $240 $11 $1,928 $230 $1,698 $232 $1,466 $229 21 47 25 $240 $38 $202 $240 $10 22 48 26 $240 $37 $203 $240 $8 23 49 27 $240 $36 $204 $240 $7 $233 $1,234 S0 24 50 28 ending $240 $35 $205 $1,240 $6 $1,234 25 29 30

D E F G H K L Amortization Table Amortization Table 1 Year Rental Per Year Interest Reduction in Lease RentalPer Interest Reduction in Lease Lease Liability Lease Liability Month Month 0.5% Liability Liability - H29-M4 IPMT(SB$8, SJ5,SBS9,-SB$10,SB$7,1) PPMT(SB$8,SJ5,SBS9-SB$10,SB$7,1)N4-M5 -IPMT(SB$8,SJ6,SB$9-SBS10,SBS7,1)PPMT(SBS8,SJ6,SBS9-SB$10,SBS7,1)N5-M6 -N6- M7 @0.5% 3 26 =L4 +M4 =L5+M5 =L6+ M6 =L7+M7 =L8+ M8 EL9+M9 IPMT(SB$8,SJ4,$B$9,-SB$10,SB$7,1)PPMT(SB$8,SJ4,SB$9-SB$10,SB$7,1) - B10 - H4-G5 - H5-G6 4 0 |=IPMT(SB$8,SD5,$B$9,SB$10- $BS7,1) = IPMT (SB$8 ,SD6,SB$9, SB$10,SB$7,1) - IPMT (SB$8, SD7,SB$9, SB$10,SBS7,1) IPMT(SBS8 ,SD8,SBS9,SB$10,SBS7,1) IPMT( SB$8 , $D9, $B$9, SB$10,SB$7,1) =PPMT(SB$8,$D5,SB$9-$B$10,SB$7,1) -PPMT( SB$8 . $D6,$B$9-$B$10,$B$7,1) - PPMT ( SB$ 8,SD7,SBS9 ,- SB$ 10,SB$7,1) -PPMT(SBS8 , SD8,SB$9- SB$10,SB$7,1) -PPMT ( SBS8 ,SD9,SBS9-SBS10, SB$7,1) = F5+G5 - F6+G6 - F7+G7 -F8+G8 - F9+ G9 - F10+ G10| - IPMT($B$8,SD10,SB$9-SB$10,SB$7,1)PPMT(SBS8,SD10,SB$9,-SB$10,$B$7,1)H9-G10 - F11+G11 | - IPMT($B$8,SD11,SB$9-SB$10,SB$7,1)PPMT(SB$8,S$D11,SBS9,- SB$10,$B$7,1)H10-G11 - F12+ G12 | IPMT(SB$8,SD12,SB$9-SB$10,SB$7,1)PPMT(SBS8,SD12,SBS9,- SB$10,$B$7,1)H1-G12 - F13+G13 | IPMT(SB$8,SD13,SB$9,-SB$10,SB$7,1)PPMT(SBS8,SD13,SBS9,- SB$10,$B$7,1)H12-G13 F14+G14IPMT(SB$8,SD14,$B$9-SB$10,SB$7,1)PPMT(SB$8,SD14,SBS9-$B$10,SB$7,1) -F15+G15|- IPMT(SB$8,$D15,$B$9-SB$10,SB$7,1)PPMT(SB$8,$D15,SBS9,-SB$10,SB$7,1)H14-G15 F16+G16 IPMT(SB$8,$D16,$B$9-SB$10,SBS7,1)PPMT(SB$8,$D16,SBS9-SB$10,SB$7,1)H15-G16 - F17 + G17 | - IPMT($B$8,SD17,SB$9-SB$10,SB$7,1)PPMT(SBS8,SD17,SBS9,- SB$10,$B$7,1)H16-G17 - F18+G18-IPMT($B$8.$D18,$B$9-$B$10.$B$7,1)PPMT(SB$8.$D18.SBS9-$B$10,$B$7,1)-H17-G18 -F19+G19 - IPMT($B$8, $D19,SB$9- $B$10,$B$7,1)PPMT(SB$8,$D19,SB$9 SB$10,SBS7,1)H18-G19 - F20+ G20 | IPMT(SB$8,SD20,SB$9-SB$10,SB$7,1)PPMT(SBS8, SD20,SBS9,-SB$10,SB$7,1)H19-G20 - F21 + G21 | IPMT(SBS8,SD21,SB$9-SBS10,SBS7,1)PPMT(SBS8,SD21,SBS9-SB$10,SBS7,1)H20-G21 - F22+G22 | IPMT(SB$8,SD22,SBS9-SB$10,SB$7,1) PPMT(SBS8,SD22,SBS9,- SB$10,SB$7,1)H21-G22 -F23+G23| IPMT(SB$8,$D23,$B$9-SB$10,SB$7,1)PPMT(SB$8,$D23,SB$9,-SB$10,SB$7,1)H22-G23 F24+G24IPMT(SB$8,$D24,$B$9-SB$10,SBS7,1)PPMT(SB$8,$D24,SBS9-SB$10,SB$7,1)H23-G24 - F25+G25 | IPMT($B$8,SD25,SB$9-SB$10,SB$7,1)PPMT(SBS8,SD25,SBS9,- SB$10,$B$7,1)H24-G25 - F26+G26 IPMT(SB$8,$D26, SB$9-SB$10,SBS7,1)PPMT(SB$8,$D26,SBS9,-SB$10,SBS7,1)-H25-G26 - F27+ G27 | IPMT(SB$8,SD27,SB$9-SB$10,SB$7,1)PPMT(SBS8,SD27,SBS9,- SB$10,$B$7,1)H26-G27 - F28+ G28 IPMT(SB$8,SD28,SB$9,-SB$10,SB$7,1)PPMT(SBS8,SD28,SBS9,- SB$10,$B$7,1)H27-G28 - F29+G29 IPMT(SB$8,SD29,SB$9-SB$10,SB$7,1)PPMT(SBS8,SD29,SBS9,- SB$10,$B$7,1)H28-G29 27 1 28 2 6 - IPMT ( SB$8,SJ7,SB$9,- SB$10,SBS7,1) PPMT(SB$8,SJ7,SBS9- SBS10,SB$7,1) - IPMT ( SB$ 8, SJ8,SBS9,- SB$10,SBS7,1)PPMT(SB$8,SJ8,SB$9- SB$10,SB$7,1) 29 - H6-G7 - H7-G8 -H8-G9 3 7 30 8 4 -IPMT(SB$8,SJ9,SB$9 SB$10,SBS7,1)PPMT(SBS8,SJ9,SBS9-SB$10,SBS7,1)NS-M9 =L10+ M10 | IPMT(SB$8,SJ10,SB$9 ,- SB$ 10,SB$7,1)PPMT(SB$8,SJ10,SBS9, - SB$10,SB$7,1)N9-M10 -L11+M11 IPMT(SB$8,SJ11,SB$9 SB$10,SB$7,1) -PPMT(SB$8,$J11,SB$9-SB$10,$B$7,1)N10-M11 -L12+ M12 | -IPMT(SB$8, $J12,$B$9-SB$10,$B$7,1)PPMT(SB$8,$J12, $B$9 , - $B$10,$B$7,1)N11-M12 -L13+M13 IPMT(SBS8,SJ13,SB$9 SB$10,SB$7,1)-PPMT(SBS8,SJ13,SBS9-SB$10,$B$7,1)N12-M13 -L14 M14 | - IPMT(SB$8, SJ14, SBS9,-SB$10,SBS7,1)PPMT(SB$8,SJ14,SBS9, - SB$10,SB$7,1)N13-M14 -L15+M15 - IPMT(SBS8,SJ15,SB$9 SB$10,SB$7,1) -PPMT(SBS8,SJ15,SBS9,- SB$10,SB$7,1)N14-M15 -L16+ M16 - IPMT(SB$8,SJ16,SB$9-SB$10,SB$7,1) -PPMT(SB$8,SJ16,SBS9,-SB$10,SB$7,1)N15-M16 =L17+ M17 IPMT(SB$8,$J17,SB$9,-SB$10,$B$7,1)PPMT(SB$8,SJ17,SB$9 SB$10,$B$7,1)N16-M17 L18+M18 IPMT(SBS8,SJ18,SBS9-SB$10,SB$7,1)PPMT(SBS8,SJ18,SB$9-SB$10,SB$7,1)N17-M18 |L19+M19 -IPMT($B$8,$J19,$B$9,-$B$10,$B$7,1)PPMT($B$8,$J19,SB$9, S$B$10,SB$7,1)N18-M19 - L20+M20 - IPMT(SBS8,SJ20,SB$9-SB$10,SB$7,1) -PPMT(SBS8,SJ20,SBS9,-SB$10,SB$7,1)N19-M20 - L21+ M21 - IPMT(SBS8,SJ21,SB$9-SBS10,SB$7,1) -PPMT(SB$8,SJ21,SBS9,-SB$10,SB$7,1)N20-M21 - L22+M22 | IPMT(SB$8,SJ22,SBS9,-SB$10,SB$7,1) -PPMT(SB$8,SJ22,SBS9,-SB$10,SB$7,1)N21-M22 L23+M23 IPMT(SB$8,SJ23,$BS9-SB$ 10,SB$7,1)PPMT(SBS8,SJ23,SBS9- SB$10,$B$7,1)N22-M23 L24+M24| IPMT(SB$8, SJ24,SB$9,-SB$10,SBS7,1) -PPMT(SBS8,SJ24,SBS9,-SB$10,SBS7,1) N23-M24 |=L25+M25 | - IPMT($B$8,$J25,$B$9,_$B$10,$B$7,1)PPMT($B$8,$J25, $B$9,-SB$10,SB$7,1) N24-M25 - L26+M26 - IPMT(SB$8,SJ26,SB$9 SB$10,SB$7,1) -PPMT(SBS8,$J26,SBS9-SB$10,SB$7,1)N25-M26 =L27+M27 | - IPMT(SB$8, $J27,SB$9-SB$10,SBS7,1)PPMT(SB$8,SJ27,SBS9 ,- SB$10,SBS7,1)N26-M27 -L28+M28 IPMT(SB$8,SJ28,SBS9-SB$10,SB$7,1)PPMT(SB$8,$J28,SB$9-SB$10,$B$7,1)N27-M28 -N28- M29 31 32 33 9 5 10 6 11 7 34 12 8 35 36 37 38 13 9 14 10 15 11 16 12 17 13 39 40 41 42 18 14 19 15 20 16 43 44 21 17 22 18 45 46 47 48 23 19 24 20 25 21 26 22 49 27 23 50 endingL29+M29N28*0 .5 % 28 24 - N28 29 25 30

P Q S T JoumalEntries 1 Debit (S) $11,614 Credit (S) 2 Date Account Titles Lease Equipment 1 $11,614 Lease Liability To record the lease liability) Lease Liability 4 5 $240 2 6 $240 Cash 7 To record the first lease payment) Lease Liability Interest Expense 8 $183 3 9 $57 10 $240 11 Cash Amortization Expense $173 4 12 $173 Accumulated Amortization 13 To record the amortiation Expense) 14 15 16 t n CO

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