Question
In: Accounting
On January 2, 2017 Nash Company leases a machine with a fair value of $34,000 from...
On January 2, 2017 Nash Company leases a machine with a fair value of $34,000 from Snead, Inc., on the following terms:
| 1. | Noncancelable term of 4 years. | |
| 2. | Rental of $8,400 per year (at beginning of each year). | |
| 3. | Estimated residual value after 4 years is $4,200. Nash Company guarantees the residual value of $4,200. | |
| 4. | Estimated economic life of the machine is 5 years. | |
| 5. | Nash Company’s incremental borrowing rate is 8% a year. Snead’s implicit rate is unknown. |
Instructions:
What is the present value of the minimum lease payments?
Record the lease and first lease payment on Nash Company’s books at the date of inception.
Record the first year’s depreciation on Nash Company’s books (assume straight-line).
Record the interest payable on Nash’s books at December 31, 2017.
Solutions
Expert Solution
| Nash Company leases a machine with a fair value of $34,000 | |||||||||
| Noncancelable term of 4 years. | |||||||||
| Rental of $8,400 per year (at beginning of each year). | |||||||||
| Estimated residual value after 4 years is $4,200. Nash Company guarantees the residual value of $4,200. | |||||||||
| Estimated economic life of the machine is 5 years. | |||||||||
| Nash Company’s incremental borrowing rate is 8% a year. Snead’s implicit rate is unknown. | |||||||||
| What is the present value of the minimum lease payments? | |||||||||
| PV of lease Payments | |||||||||
| Annual Payment*Sum of PV of 10% for 0 to 3 years | $ 30,047.61 | ||||||||
| (8400*3.577097) | |||||||||
| PV ofGuaranteed esidual Value (GRV*PVF of 8% of 4th year | $ 3,087.13 | ||||||||
| (4200*0.73503) | |||||||||
| Present Valueof minimum lease payment | $ 33,134.74 | ||||||||
| Record the lease and first lease payment on Nash Company’s books at the date of inception. | |||||||||
| Machine on Lease A/c Dr | $ 33,134.74 | ||||||||
| To Lesse Liability A/c | $ 33,134.74 | ||||||||
| Lease Liability | $ 8,400.00 | ||||||||
| To Bank | $ 8,400.00 | ||||||||
| Record the first year’s depreciation on Nash Company’s books (assume straight-line). | |||||||||
| Depreciation A/c | $ 7,233.69 | [33134.74-4200]/4 year | |||||||
| To Machine on lease | $ - | $ 7,233.69 | |||||||
| Record the interest payable on Nash’s books at December 31, 2017 | |||||||||
| Finance Cost A/c Dr | $ 1,978.78 | ||||||||
| To Lease Liability | $ 1,978.78 | ||||||||
| Calculation of Interest Cost | |||||||||
| Lease Liability | |||||||||
| 02.01.2017 | Value of asset | $ 33,134.74 | |||||||
| Less: Payment Made on 02.01.2017 | $ 8,400.00 | ||||||||
| Lease Liability as on 31.12.2017 | $ 24,734.74 | ||||||||
| Interest Exp @ 8% | $ 1,978.78 | ||||||||
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