Question

Marin Company leases an automobile with a fair value of $16513 from John Simon Motors, Inc., on the following terms nting ates 1. Non-cancelable term of 50 months. 2. Rental of $340 per month at the beginning of each month).(The present value at 0.5% per month is $15,084) 3. Marin guarantees a residual value of $1420 (the present value at 0.5% per month is $1,107). Marinexpects the probable residual value to be $1.420 at the end of the lease term 4. Estimated economic life of the automobile is 60 months. 5. Marin's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicitrate is unknown support Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factortable provided) What is the nature of this lease to Marin? - lesse The nature of this lease is a/an

Answer 1

1)nature is finance or capital lease.

note:

a lease is classified as finance lease when :

1.transfer of ownership to the lessee

2.less term should be equal to 75% or more for estimated economic life of asset

3.lease rental expense is greater than 90 % of MV of leased asset

2) present value of lease liability

PV=SUM[P/(1+r)^n]+[RV/(1+r)^n]

where PV = Present value

P=Monthly lease payment

r=interest rate

n=no years in lease term(50/12=4.17)

RV= Residual value

PV = SUM[340/(1+0.6)^4.17]+[1420/(1+0.6)^4.17]

=340/7.1+1420/7.1

pv =$248/month

3) lease record on marins book

ACCOUNTS TITLE AND EXPLANATION	DEBIT	CREDIT
lease asset	16513
lease liability		16513

4) first month lease payment :

ACCOUNTS TITLE AND EXPLANATION	DEBIT	CREDIT
lease rent expense	340
cash		340

(to record first lease rental payment for commencement of lease)

5) second month lease payment :

ACCOUNTS TITLE AND EXPLANATION	DEBIT	CREDIT
lease rent exense	338
interest expense	2
cash		340

6) journal for first months amortization on marins books

accounts title and explanation	debit	credit
depreciation	300
accumilated depreciation		300

7)PV =SUM[340/(1+0.6)^4.17)+[500/(1+0.6)^4.17]

=340/7.1+500/7.1

=119/MONTH