Your answer is partially correct. Try again Larkspur enters into an agreement wi
ID: 2513481 • Letter: Y
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Your answer is partially correct. Try again Larkspur enters into an agreement with Traveler Inc. to lease a car on December 31, 2016. The following information relates to this agreement. The term of the non-cancelable lease is 5 years with no renewal or bargain purchase option. The remaining economic life of the car is 3 years, and it is expected to have no residual value at the end of the lease term. 1. 2. The fair value of the car was $13,380 at commencement of the lease. 3. Annual payments are required to be made on December 31 at the end of each year of the lease, beginning December 31, 2017. The first payment is to be of an amount of $4,953.20, with each 4, Larkspur, incremental borrowing rate is 8%. The rate implicit in the lease is unknown. 5. Larkspur uses straight-line depreciation for all similar cars. payment increasing by a constant rate of 5% from the previous payment (i.e., the second payment will be $5,200.86 and the third and final payment will be $5,460.90)Explanation / Answer
On Purchase of Asset
12/31/16 Leased Car A/c Dr $ 13,380
To Traveler Inc A/c 13,380
Interest Booking and payment at year end 31/12/17
12/31/17 Traveler Inc A/c Dr $ 4,244
Interest A/c Dr $ 709.20
To Cash A/c $4,953.20
(Refer working note 1)
12/31/17 Depreciation Expense A/c Dr 4460
To Accumulated Depreciation A/c 4460
Interest Booking and payment at year end 31/12/18
12/31/18 Traveler Inc A/c Dr $ 4,456.2
Interest A/c Dr $ 744.66
To Cash A/c $5,200.86
(Refer working note 1)
12/31/18 Depreciation Expense A/c Dr 4460
To Accumulated Depreciation A/c 4460
Working note 1:
We have calculated the equated payment principal amount payable to Traveler inc considering the 5% growth each year. Hence the 1st principal amount will be 4,244, 2nd will be 4,456.2 and final principal amount will be 4,679.01. Since already we have the installment amount payable, interest has been derived by subtracting the Installment amount and principal amount calculated.
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