E21-2 (Lessee
Computations and Entries; Capital Lease with Guaranteed Residual Value)
E21-2 Pat Delaney
Company leases an automobile with a fair value of $8,725 from John Simon
Motors, Inc., on the following terms:
1. Noncancelable
term of 50 months.
2. Rental of $200
per month (at end of each month). (The present value at 1% per month is
$7,840.)
3. Estimated
residual value after 50 months is $1,180. (The present value at 1% per month is
$715.) Delaney Company guarantees the residual value of $1,180.
4. Estimated
economic life of the automobile is 60 months.
5. Delaney
Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s
implicit rate is unknown.
Instructions
(a) What is the
nature of this lease to Delaney Company?
(b) What is the
present value of the minimum lease payments?
(c) Record the
lease on Delaney Company’s books at the date of inception.
(d) Record the
first month’s depreciation on Delaney Company’s books (assume straight-line).
(e) Record the
first month’s lease payment.
TUTORIAL PREVIEW
(c)
|
Account Titles and
explanation
|
Debit
|
Credit
|
|
Leased Equipment
|
8,555
|
|
|
Lease Liability
|
|
8,555
|
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