E21-2B (Lessee Computations and Entries; Capital Lease with Guaranteed Residual
ID: 2466685 • Letter: E
Question
E21-2B (Lessee Computations and Entries; Capital Lease with Guaranteed Residual Value) Jupiter Corp. leases a rocket-themed amusement ride with a fair value of $110,000 on the following terms: 1. Noncancelable term of 10 years. 2. Rental of $16,000 per year (at the end of each year). The present value at 10% per year is $98,313. 3. Estimated residual value after 10 years is $10,000. The present value at 10% per year is $3,855. Jupiter Corp. guarantees the residual value of $10,000. 4. Estimated economic life of the ride is 12 years. 5. Jupiter’s incremental borrowing rate is 10% a year. The lessor’s implicit rate is unknown.
Instructions
(a) What is the nature of this lease to Jupiter?
(b) What is the present value of the minimum lease payments?
(c) Record the lease on Jupiter’s books at the date of inception.
(d) Record the first year’s depreciation on Jupiter’s books. (Assume straight-line.)
(e) Record the first year’s lease payment.
PLEASE ANSWER ALL PARTS AND SHOW ALL CALCULATIONS. PLEASE DO NOT ANSWER IF YOU CANNOT ANSWER ALL PARTS.
Explanation / Answer
(a) This is a capital lease to Burke since the lease term (10 years) is greater than 75% of the economic life (12 years) of the leased asset. The lease term is 83% (10 ÷ 12) of the asset’s economic life.
(b) Computation of present value of minimum lease payments:
$98,313 + 3,855 = $102,168
(c) Record the lease on Jupiter’s books at the date of inception.
1/1/01 Leased Machine Under Capital Leases 102,168
Obligations Under Capital Leases 102,168
(d) Record the first year’s depreciation on Jupiter’s books. (Assume straight-line.)
12/31/01 Depreciation Expense 9,831
Accumulated Depreciation— Capital Leases 9,831
(e) Record the first year’s lease payment.
Obligations Under Capital Leases $5,783
Interest expense $10,217
Cash $16,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.