Question

E21.3 (LO 2, 4) (Lessee Computations and Entries; Finance Lease with Guaranteed Residual Value) Delaney Company leases an automobile with a fair value of $10,000 from Simon Motors, Inc., 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 incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown. Instructions a. What is the nature of this lease to Delaney? b. What is the present value of the lease payments to determine the lease liability? c. Based on the original fact pattern, record the lease on Delaney's books at the date of commencement. d. Record the first month's lease payment (at commencement of the lease). e. Record the second month's lease payment. f. Record the first month's amortization on Delaney's books (assume straight-line). g. 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 b?

Answer 1

page 1 Given data that 1) Non-conceable to conceable tem of 50 months 2) Rental of $ 200 peoy mor 3) Delaney guasten " guagjentees a Besidual value of $ 1,180 Delaney expects ney expects the probable Residual value to the $ 1,180 at end of lease tegim 4) Estimated economic life of A a economic life of Automobile in 60 months a) The Natugle of this lease to delaney is capital lease because the lease tegims satisfy the following coitesia: i) The lease tegim (50 months) is goleatesy than 75. of the economic life of the Amet (60 months that is the lease team is 83.33 of the economic life of Amet 50 months · 60 months : 83.33-| ii) The present Value of the minimum Lease payments $8,843+ $920 = $ 9,793 is gseatesy than 90% of the faisy value

1 of page2 the leased Asset ($10,000). 00), that is ne polesent Value of $9.493 is 94.93.1 of the faigh value of the leased Asset $ 9,4931 $ 10,000 : 94.93.1 Delaney Thegje fose the natugle of the lease to is capital lease b) The present value of lease payments is calculated as follows: pu of lease payments = pv of monthly payment + pu of guasyenteed Besidual Value = $8,8434 $920 = $ 9,493 (c,d,e,f) Bight of use Asset will be Recosyded at the pjesent value of lease payments and Coopjesponding Lease payable Account will

be (edit with the same amount Page 3 Game Amount · A11 the Bequigled Jousinal entsties to Record the Requisted Jour lease on on Delaney's books is shown as follows:- Delaney's No. Account Titles Debit Covedit une Amet 9,493 Dease payable 4,493 (To Recogd the lease al commencement) d) Integest expense : ($4,493 X 0.5l) + 48.96 Dease payable (200-48.96) 151.04 Cash 200 (To Recould the figust lease payment) e) Integfest Expense [19,893 - 151.04) * 0.519] 48.21 Lease payable (200-48.21) 151.49 cash 200 (To Record the second lease payment)

page 4 f) Amostization (9,493 expense 50 months 195.86 Right of une awet. 19. of use Asset 195.86 Coeld the figist month's Amortization)