On October 1, Year 2, Knightco signed a lease with JackDeer Corp. for a piece of
ID: 2417807 • Letter: O
Question
On October 1, Year 2, Knightco signed a lease with JackDeer Corp. for a piece of equipment that Knightco needs for a new production process. The lease is for four (4) years with the first payment due at the time the lease is signed and the remaining payments due on September 30th each year thereafter. At the end of the lease, the equipment will be returned to JackDeer. In order to secure a slightly smaller lease payment, Knightco has guaranteed the estimated residual value of $49,000 at the end of the lease period.
The equipment has a fair market value of $815,000 and costs JackDeer $375,000 to produce. The estimated useful life of the asset is 6 years with no salvage value.
JackDeer used a 4% implicit rate to determine the lease payments. Knightco doesn’t know JackDeer’s implicit interest rate. Knightco’s incremental borrowing rate is 9%.
Round all of your work to the nearest dollar! HINT: You might want to create the tables in Excel, then copy the numbers into the tables below.
Complete the following tables:
LEASE AMORTIZATION SCHEDULE - JackDeer
Residual Value
$49,000
PV of RV:
Market Value
$815,000
PV OF MLP:
INTEREST RATE:
4.0%
TERM in YRS
PAYMENT:
Reduction in
Lease
Lease
Interest
Lease
Liability
Date
Payment
Expense
Liability
BALANCE
Oct. 1, Year 2
$815,000
Oct. 1, Year 2
Sept. 30, Year 3
Sept. 30, Year 4
Sept. 30, Year 5
Sept. 30, Year 6
LEASE AMORTIZATION SCHEDULE - Knightco
BPO or Guar. RV
$49,000
PV of RV:
Market Value
PV OF MLP:
INTEREST RATE:
9.0%
TERM in YRS
PAYMENT:
Reduction in
Lease
Lease
Interest
Lease
Liability
Date
Payment
Expense
Liability
BALANCE
Oct. 1, Year 2
Oct. 1, Year 2
Sept. 30, Year 3
Sept. 30, Year 4
Sept. 30, Year 5
Sept. 30, Year 6
LEASE AMORTIZATION SCHEDULE - JackDeer
Residual Value
$49,000
PV of RV:
Market Value
$815,000
PV OF MLP:
INTEREST RATE:
4.0%
TERM in YRS
PAYMENT:
Reduction in
Lease
Lease
Interest
Lease
Liability
Date
Payment
Expense
Liability
BALANCE
Oct. 1, Year 2
$815,000
Oct. 1, Year 2
Sept. 30, Year 3
Sept. 30, Year 4
Sept. 30, Year 5
Sept. 30, Year 6
Explanation / Answer
LEASE AMORTIZATION SCHEDULE - Knightco
IIS THIS A CAPITAL LEASE? YES- 100% OF LIFE IS>75% AND Pv of Payments>90%
LEASE AMORTIZATION SCHEDULE - Knightco
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