Exercise 21-2 LINK TO TEXT Account Titles and Explanation Debit Credit Account T
ID: 2514040 • Letter: E
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Exercise 21-2
LINK TO TEXT
Account Titles and Explanation
Debit
Credit
Account Titles and Explanation
Debit
Credit
Account Titles and Explanation
Debit
Credit
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Exercise 21-2
Carla Company leases an automobile with a fair value of $16,738 from John Simon Motors, Inc., on the following terms:1. Noncancelable term of 50 months. 2. Rental of $400 per month (at end of each month). (The present value at 1% per month is $15,679.) 3. Estimated residual value after 50 months is $1,190. (The present value at 1% per month is $724.) Carla Company guarantees the residual value of $1,190. 4. Estimated economic life of the automobile is 60 months. 5. Carla Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown.
Explanation / Answer
b)
The present value of minimum lease payments will be;
= Present value of rental + Present value of residual value
= 15,679 + 724
= $ 16,403
c)
Automobile (Fixed Asset) Dr. $ 16,403
To Finance Lease (Liability) Cr. $16,403
(15,679 + 724 = 16,403)
d)
Depreciation (Expense) Dr. $273.38
To, Accumulated Depreciation (Provision) Cr. $ 273.38
(16,403 / 60 = 273.38)
e)
Finance Lease (Liability) Dr. $ 164.03
Finance Charges (Expense) Dr. $ 235.97
To Bank (Asset) Cr. $ 400
(16,403 X 1% = $164.03)
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