PROBLEM III Dumont Corporation, a lessor of office machines purchased a new mach

Question

PROBLEM III Dumont Corporation, a lessor of office machines purchased a new machine for S The following information relating to the lease transaction is available December 31,2002, which was delivered the same day to Finley Company, the lessee. The leased asset has an estimated useful life of six years The lease term is five years. At the end of the lease term, the machine will re have a residual value of $70,000 ( none of which is guaranteed by Finely) . Dumont's implicit interest rate is 1 1%, which is known by Finley · Finley's incremental borrowing rate is 15% at December3 1,2002. .L ease rental consists of seven December 31,2002 Both lessor and lessee are calendar -year corporations and depreciate all fixed assets on the straight-line basis. equal annual payments , the first of which was paid on Information on the present value factors is as follows Present value of $1 for five periods at 15% Present value of $1 for five periods at 11%) Present value of an annuity due of 1 for five periods at(11% Present value of an annuity due of 1 for five periods at 15% . 0.497 0.593 . · 3.854 Required: 1) Compute the annual rental under the lease. 57 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. sheet

Explanation / Answer

1)computation of annul lease rental under lease;

cost of new machine=$ 600,000

lease term =5 years

lease rental consists of seven equal annul payments

so lease rental per annum=cost of machine/annuity factor for seven years

annuity factor for seven years @11%=4.712

annul lease rent=600,000/4.712

=$ 127,334

2)expense that to be recorded ae the year end december 2003;

interest amount=600,000*15%

=$ 90,000

principal amount repayment=annul rental-interest amount

=127,334-90,000

=$ 37,334

expense that lessee recorded=$ 90,000

3)journal entries;

for the year ending december 31,2012

machinary a/c ..$ 600,000

dumont corporation a/c..$600,000

(being machine acuired on lease from lessor

for the year ending 31 december 2003;

finance charge a/c ..dr $90,000

dumont corporation a/c $90,000

(being finance charges for 1 st year due)

dumont corporation a/c ...dr $127,334

bank $127,334

(being the rent paid to lessor which includes interset 90,000&principal amount 37334)

depreciation a/c dr..

machinary

(being depreciation charged)

depreciation=cost of machine-scrap value/lease period

=600,000-70,000/5

=$ 106,000

profit &loss a/c dr...$ 196,000

depreciation $ 106,000

finance charges $ 90,000

4)gross investment for the lessor;

annul rental*number of years+residual value

127,334*7+70,000

$ 961,338

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