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Chapter 21: 9IFRS_b (page 1263)

Brecker Company leases an automobile with a fair value of \(10,906 from Emporia Motors, Inc., on the following terms:

  1. Non-cancelable term of 50 months.
  2. Rental of \)250 per month (at end of each month). (The present value at 1% per month is \(9,800.)
  3. Estimated residual value after 50 months is \)1,180. (The present value at 1% per month is \(715.) Brecker Company guarantees the residual value of \)1,180.
  4. Estimated economic life of the automobile is 60 months.
  5. Brecker Company鈥檚 incremental borrowing rate is 12% a year (1% a month). It is impracticable to determine Emporia鈥檚 implicit rate.

Instructions

(b) What is the present value of the minimum lease payments?

Short Answer

Expert verified

Answer

The present value of minimum lease payments is $10,515.

Step by step solution

01

Meaning of Residual Value

The estimated worth of a fixed asset when it is no longer useful or after its lease term has expired is known as residual value. The definition of residual value varies per industry, but the essential idea remains the same.

02

Explaining the present value of the minimum lease payments

In the case of a guaranteed residual value by the lessee, the guaranteed residual value is included in the minimum lease payments. As a result, the current value is:

Monthly payment of $250 for 50 months

$ 9,800

The residual value of $1,180

715

Present value of minimum lease payments

$10,515

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Most popular questions from this chapter

(Accounting for an Operating Lease) On January 1, 2017, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.

  1. The lease arrangement is for 10 years.
  2. The leased building cost \(4,500,000 and was purchased for cash on January 1, 2017.
  3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
  4. Lease payments are \)275,000 per year and are made at the end of the year.
  5. Property tax expense of \(85,000 and insurance expense of \)10,000 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year.
  6. 6. Both the lessor and the lessee are on a calendar-year basis.

Instructions

  1. Prepare the journal entries that Nelson Co. should make in 2017.

Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of \(40,000 each, beginning January 1, 2017. In addition, Indiana Jones guarantees the lessor a residual value of \)20,000 at lease-end. The equipment has a useful life of 6 years. Prepare Indiana Jones鈥� January 1, 2017, journal entries assuming an interest rate of 10%.

Question: Lessee Entries; Capital Lease with Unguaranteed Residual Value) On January 1, 2017, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of \(8,668 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a \)5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke鈥檚 incremental borrowing rate is 10%, and the lessor鈥檚 implicit rate is unknown.

Instructions

(c) Prepare all necessary journal entries for Burke for this lease through January 1, 2018.

Morgan Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.

  1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
  2. The cost of the asset to the lessor is \(245,000. The fair value of the asset at January 1, 2017, is \)245,000.
  3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $43,622, none of which is guaranteed.
  4. Cole Company assumes direct responsibility for all executory costs.
  5. The agreement requires equal annual rental payments, beginning on January 1, 2017.
  6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

Instructions

(Round all numbers to the nearest cent.)

(a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. (Round to the nearest dollar.)

Question: The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee.

Inception date

January 1, 2017

Annual lease payment due at the beginning of each year, beginning with January 1, 2017

\(124,798

Residual value of equipment at end of lease term, guaranteed by the lessee

\)50,000

Lease term

6 years

Economic life of leased equipment

6 years

Fair value of asset at January 1, 2017

\(600,000

Lessor鈥檚 implicit rate

12%

Lessee鈥檚 incremental borrowing rate

12%

The lessee assumes responsibility for all executory costs, which are expected to amount to \)5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straightline depreciation method for all equipment.

Instructions

(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
See all solutions

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