Question

Splish Company leases an automobile with a fair value of $15,755 from John Simon Motors, Inc., on the following terms:

1.		Noncancelable term of 50 months.
2.		Rental of $360 per month (at end of each month). (The present value at 1% per month is $14,111.)
3.		Estimated residual value after 50 months is $1,150. (The present value at 1% per month is $699.) Splish Company guarantees the residual value of $1,150.
4.		Estimated economic life of the automobile is 60 months.
5.		Splish Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown.

Answer 1

Ans:

1.The nature of the lease to splish company is

The lease is finance lease as the lease term of 50 months cover the substantial economic life of asset which 60 months.

2.The present value of the minimum lease payments is

The present value of minimum lease payments will be;

=present value of rental + present value of residual value

=$14,111 + $699

=$14,810.

3.Record lease on Splish Company books at date of inception.

Particulars	Debit ($)	Credit ($)
Automobile (fixed asset)Dr. To Finance Lease (liability) ($14,111 + $699 = $14,810)	14,810	14,810

4.Record 1^st month depreciation on Splish Company books (Straight line).

Particulars	Debit ($)	Credit ($)
Depreciation (expense)Dr. To Accumulated depreciation (liability) ($14,810 / 60 = 246.80)	246.80	246.80

5.Record 1^st month lease payment

Particulars	Debit ($)	Credit ($)
Finance lease (liability)Dr. Finance charges (expense)Dr. To Bank (asset) ($14,810 * 1%= 148.10)	148.10 211.90	360