Question

Exercise 21A-3 a-g Larkspur Company leases an automobile with a fair value of $20,964 from John Simon Motors, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $440 per month (at the beginning of each month). (The present value at 0.5% per month is $19,520.) 3. Larkspur guarantees a residual value of $1,330 (the present value at 0.5% per month is $1,036). Larkspur expects the probable residual value to be $1,330 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Larkspur’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.

a. Record the second month's lease payment

Account titles debit credit

Interest expense ?

Lease liability ?

Cash - 440

b. Record the first month’s amortization on Larkspur’s books (assume straight-line).

Account titles debit credit

Amortization expense ? -

Right of use asset - ?

c. Suppose that instead of $1,330, Larkspur expects the residual value to be only $500 (the guaranteed amount is still $1,330). How does the calculation of the present value of the lease payments change from part (b)?

PV of lease payments ?

PLEASE HELP ASAP!!! THANK YOU!!!

Answer 1

Let us first ascertain the PV of Minimum of Lease Payments (MLP)

PV of MLP	Present value
Monthly payment of $ 440 for 50 months	$        19,520
Residual value of $ 1,330	$          1,036
Present value of MLP	$        20,556

Entry for Second month payment would be

Account	Debit	Credit
Lease Liability	$        344.60
Interest Expense (0.5% X (19,520 - 440))	$          95.40
Cash		$ 440.00
(To record second month lease payment)

Depreciation

Account	Debit	Credit
Amortization Expense (19,520 / 50)	$        390.40
Right of Use Asset		$ 390.40

c.

PV of MLP	Present value
Monthly payment of $ 440 for 50 months	$        19,520
PV of GRV (1,330 - 500) X 0.77929	$              491
Present value of MLP	$        20,011