PROBLEM 111 Dumont Corporation, a lessor of office machines December 3 ,2002, wh

Question

PROBLEM 111 Dumont Corporation, a lessor of office machines December 3 ,2002, which was delivered the same day to Finley Company, purchased a new machine for $600,000 on the lessee. The following information relating to the lease transaction is available: . The leased asset has an estimated useful life of six years The lease term is five years. t the end of the lease term, the machine will revert to Dumont, at which time it is expected to have a residual value of $70,000 (none of which is guaranteed by Finely) Dumont's implicit interest rate is 1 196, which is known by Finley. Finley's incremental borrowing rate is 15% at December31 2002. Lease rental consists of seven equal annual payments , the first of which was paid on December 31, 2002 . . . Decem bertal consitsoog aach is Both lessor and lessee are calendar -year corporations and depreciate all fixed assets on the straight-line basis. " Information on the present value factors is as follows: 0.497 Present value of $1 for five periods at 15% Present value of $1 for five periods at 1 1% Present value ofan annuity due of 1 for five periods at l 1%-................4 0593 . 3.854 Present value of an annuity due of 1 for five periods at 15% Required: 1) Compute the annual rental under the lease. 2) Calculate the expense that the lessee recorded for the year ended December 31,2003. 3) Prepare all the journal entries on the book of lessee for the years ending December 31, 2002 and December 31, 2003. 4) Determine Gross investment for the lessor.

Explanation / Answer

Year PVIF@11% Gross Investment in Lease Right to use asset Interest expense for lessee 0 1 136128.1658 136128.1658 0 1 0.900900901 136128.1658 122637.9872 13490.17859 2 0.811622433 136128.1658 110484.6732 25643.49264 3 0.731191381 136128.1658 99535.74159 36592.42422 4 0.658730974 136128.1658 89671.83927 46456.32654 5 0.593451328 70000 41541.59296 600000 =600000-41541.59296 558458.407 Annuity factor 4.10244569 Requirement 1 Annual rental under lease 136128.1658 Requirement 2 Lessee recorded the interest expense of 13490.17859 for the year ended December 31, 2003 Requirement 3 Amount in $ Date General Journal Debit Credit December 31, 2002 Right to use an asset 5,58,458.41 Leased Liability 5,58,458.41 To record the inception of lease December 31, 2002 Leased Liability 1,36,128.17 Cash 1,36,128.17 To record the payment of first installment towards the lease December 31, 2003 Leased Liability 1,22,637.99 Interest expense     13,490.18 Cash 1,36,128.17 To record the payment of second installment towards the lease December 31, 2003 Depreciation on right to use an asset 1,11,691.68 Accumulated depreciation 1,11,691.68 To charge the annual depreciation on right to use an asset Requirement 4 The gross Investment in the lease for lessor is Minimum lease payment from Lessee's point of view+ungauranted residual value So its 750640.829

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