Question 2 Pat Delaney Company leases an automobile with a fair value of $11,708

Question

Question 2

Pat Delaney Company leases an automobile with a fair value of $11,708 from John Simon Motors, Inc., on the following terms. Noncancelable term of 50 months. Rental of $260 per month (at end of each month). (The present value at 1% per month is $10,191.) Estimated residual value after 50 months is $1,170. (The present value at 1% per month is $711.) Delaney Company guarantees the residual value of $1,170. Estimated economic life of the automobile is 53 months. Delaney Company's incremental borrowing rate is 12% a year (1% a month). Simon's implicit rate is unknown. What is the present value of the minimum lease payments? The present value of the minimum lease payments | Credit Record the lease on Delaney Company's books at the date of inception. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Explanation / Answer

Solution:

(A). Caluculation of Present Lease Value:

  

PV = Present Value

P = Annual Lease Payments

r = Interest rate

n = number of years in the lease term

RV = residual value.

   Present Value = [11,708 (1+0.12)1 + [ 1,170 / (1+0.12)1]

   = 11,708.12 + 1,170.12

   = 12,878.24

(B). Journal Entries for Payment of Lease:

Fixed Assets   

Lease Liabilities

Cash

(C). Entry for Depreciation:

   Depreciation Expencess

   Accumulated Depreciation

(D). Entry for Record Payment Lease:

Lease Liability 12,878.24

Interest 1,545.36

Cash 14,423.6

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

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.