Question

Please answer letters a-f

ping Tool t Tools Help Delay" E21.3 (LO2) (Lessee Computations and Entries; Lease with Guaranteed Residual Value) Delaney AG leases an automobile with a fair value of 10,000 from Simon Motors, on the following terms. 1. Non-cancelable term of 50 months. 2. Rental of 200 per month (at the beginning of each month). (The present value at 0.5% per month is €8,873.) 3. Delaney guarantees a residual value of 1,180 (the present value at 0.5% per month is €920). Delaney expects the probable residual value to be 1,180 at the end of the lease term 4. Estimated economic life of the automobile is 60 months. 5, Delaney's increm ental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown. Instructions a. What is the present value of the lease payments to determine the lease b. Based on the original fact pattern, record the lease on Delaney's books c. Record the first month's lease payment (at commencement of the d. Record the second month's lease payment. liability? at the date of commencement. lease) e. Record the first month's amortization on Delaney's books (assume straight-line) f. Suppose that instead of 1,180, Delaney expects the residual value to be only 500 (the guaranteed amount is still 1,180). How does the calculation of the present value of the lease payments change from part E21.3b.? DOLL

Answer 1

As in the given question ,

The leasing period is approximately equal to the economic life of the automobile , it is to be considered as a financial lease.

A). Present Value of lease payments:-

  Present value of rent payment ( @ .05%p.m. )

( given in question). € 8873

( + ) Present Value of the guarantee residual value

( given in question). € 920

=9793

B). Journal entry at the time of commencement of lease:-

Automobile a/c. Dr. €10000. To Simon motors a/c. €10000

( Being recognition of finance lease)

C). Journal for 1st month:-

• Finance charge a/c. Dr. €200. To Simon motors a/c. €200

( being finance charge due for 1st month)

• Simon motors a/c. Dr. €200. To bank a/c. €200 (Being payment made to lessor)
• Depreciation a/c. Dr. €167. To automobile a/c. €167

( Being depreciation charged)

D). Answer same as part C above .

E) .There will be no change in the present values.