Question

Exercise 21-03 Shamrock Company leases an automobile with a fair value of $18,013 from John Simon Motors, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $370 per month (at the beginning of each month). (The present value at 0.5% per month is $8,873.) 3. Shamrock guarantees a residual value of $1,600 (the present value at 0.5% per month is $920). Delaney expects the probable residual value to be $1,600 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Shamrock’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.
What is the present value of the lease payments to determine the lease liability? (Round answer to 0 decimal places, e.g. 5,275.) X Present value of the lease payments SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT x Your answer is incorrect. Try again. Based on the original fact pattern, record the lease on Shamrock's books at the date of commencement. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Debit Credit Account Titles and Explanation X X x

Answer 1

Present value of lease payments is $ 8,873.00 (residual value not considered, because guarenteed and expected residual value are same) SR. No. Credit Debit $ 8,873.00 1 Account Titles and Explanation Right of use asset Lease liability (To record lease liability) $8,873.00 2 $ 370.00 Lease liability Cash (To record first month lease payment) $ 370.00 3 42.52 $ $ (8873-370) *0.5% 327.49 Interest expense Lease liability Cash (To record second month lease payment) $ 370.00 4 $ 177.46 Amortisation expense Right of use asset (To record first month amortisation expense) (8873/50) $ 177.46

if the expected residual value is 500, instead of 1600 then, the lease payments is =PV(rate, nper,pmt, fv,type) =PV(0.5%,50,-370,-1100,1) So, the present value of lease payments is $ 17,271.7098 $ 17,271.7098 I hope this solves your doubt. Feel free to comment if you still have any query or need something else. I'll help asap. Do give a thumbs up if you find this helpful.