Question

21A-3 a-g

Larkspur Company leases an automobile with a fair value of $15,742 from John Simon Motors, Inc., on the following terms:

1.		Non-cancelable term of 50 months.
2.		Rental of $330 per month (at the beginning of each month). (The present value at 0.5% per month is $14,640.)
3.		Larkspur guarantees a residual value of $1,020 (the present value at 0.5% per month is $795). Larkspur expects the probable residual value to be $1,020 at the end of the lease term.
4.		Estimated economic life of the automobile is 60 months.
5.		Larkspur’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.

A. What is the present value of the lease payments to determine the lease liability? (Round answer to 0 decimal places, e.g. 5,275.)

Present value of the lease payments? $_________ B. Based on the original fact pattern, record the lease on Larkspur’s books at the date of commencement. C. Record the second month’s lease payment. D. Record the first month’s amortization on Larkspur’s books (assume straight-line). E. Suppose that instead of $1,020, Larkspur expects the residual value to be only $500 (the guaranteed amount is still $1,020). PV Of Lease Payments.. $_____

Answer 1

As per our policy, we cannot able to post solution more than four sub parts of question.

Answer 1
Present value of the lease payments
Present value of lease rental			14,640
Present value of Residual value			795
Present value of the Minimum lease payment			15,435
Answer 2 to 4
Transaction	general journal	debit	credit
B	Leased equipment	15,435
	Lease liability		15,435
	(To record lease agreement.)
C	Interest expense	76
	Lease liability	254
	Cash		330
	(To record second month’s lease payment.)
D	Depreciation expense	288
	Accumulated Depreciation		288
	(To record first month’s amortization/ depreciation.) ((15435-1020)/50)

Month	Beginning lease liability	Lease rental	Interest expense (Beginning lease liability * 0.5%)	Reduction in lease liability (Lease rental - Interest expense)	Ending lease liability (Beginning lease liability - Reduction in lease liability)
1	15,435	330		330	15,105
2	15,105	330	76	254	14,851