Show the calculations and do not work if you are not able to answer all three qu

ID: 2448596 • Letter: S

Question

Show the calculations and do not work if you are not able to answer all three questions. Thanks

E21-1B (Lessee Entries; Capital Lease with Unguaranteed Residual Value) On January 1, 2014, Manor

Inc. signed a 6-year noncancelable lease for a printing press. The terms of the lease called for Manor to

make annual payments of $54,291 at the beginning of each year, starting January 1, 2014. The printing

press has an estimated useful life of 6 years and a $10,000 unguaranteed residual value. The printing press

reverts back to the lessor at the end of the lease term. Manor uses the straight-line method of depreciation

for all of its plant assets. Manor’s incremental borrowing rate is 12%, and the Lessor’s implicit rate

is unknown.

Instructions

(a) What type of lease is this? Explain.

(b) Compute the present value of the minimum lease payments.

(c) Prepare all necessary journal entries for Manor for this lease through January 1, 2015.

Explanation / Answer

Lease term in 6 years that covers the life of the assets 6 years. Hence we can say that lease type is Finance lease.

Calculation of present value of the minimum lease payments:

Lease annual Payments

54291

Years

Borrowing rate

12%

Present value annuity factor (PVAF) (6 years, 12%)

4.11141

Present value of annual lease payments = 54291*4.11141

$ 223,212.42

Residual value

10000

Present Value factor (PVF) (6 years, 12%)

0.50663

Present value of residual value = 10000*0.506631

$ 5,066.31

Present value of the minimum lease payments = 223212.42 + 5066.31

$ 228,278.73