Question

Exercise 21-2 Blue Company leases an automobile with a fair value of $18.494 from John Simon Motors, Inc., on the following terms: 1. No cancelable term of 50 months 2. Rental of $420 per month (at end of each month). (The present value at 1% per month is $16,463) 3. Estimated residual value after 50 months is $1,210. (The present value 15 per month $236.) Blue Company guarantees the residual value of $1,210. 4. Estimated economic life of ty automobile is 60 months 5. Blue Company's incremental borrowing rate is 12% a year (1% a month). Simon's Implidt rate is unknown What is the present value of the minimum lease payments? The present value of the minimum lease payments LINE TO TEXT (c) Record the case on Blue Company's books at the date of inception (Credit account sites are automatically indented when amount is entered. Do not intent manually. If no entry is required, select "No Entry for the accounts and enter for the amounts) Account Titles and Explanation

Answer 1

Solution:

a.) The present value of the minimum lease payments :$17,199

Explanation:

The minimum lease payments in the case of a guaranteed residual value by the lessee include the guaranteed residual value. So, the present value is:

Monthly payment of $420 for 50 months	$16,463
Residual value of $1,210	$736
Present value of minimum lease payments	$17,199

c. )

Account title and Explanation	Debit	Credit
Leased Equipment	$17,199
Lease Liability		$17,199
(To record the lease on Blue company's books at the date of inception)

d.)

Account title and Explanation	Debit	Credit
Depreciation expenses	$320
Accumulated depreciation		$320
(To record the first month's depreciation)

*

Accumulated depreciation - Capital leases

=[($17,199 - $1,210) /50 months] = $319.78 or $320

e.)

Account title and Explanation	Debit	Credit
Lease liability	$248
Interest expenses	$172
Cash		$420

*

Interest expenses = (0.01 × $17,199)

=$171.99 or $172