On January 2, 201X, Tools, Inc. entered into a 6 year, non cancelable lease for
ID: 2525742 • Letter: O
Question
On January 2, 201X, Tools, Inc. entered into a 6 year, non cancelable lease for a fleet trucks. The economic life of the trucks are 6 years, and title transfers at the end of the leasing period, with bargain purchase price of $50,000. The lease calls annual payments of $100,000, beginning with the signing of the lease, and at the beginning of the next five years. The bargain purchase price will be paid at the end of the 6th year. The borowing rate for Tools Inc is 6%. Required: 1) Calculate the NPV of the lease 2) Prepare "Schedule of Lese Payments" and show the totals of the lease payments, the interest expense and the principal payments 3) Prepare the first two years of journal entries related to the lease acquisition, payments, and amortization (straight-line) 4) Prepare the final journal entry at the end of 6th year for the purchase of the assets
Explanation / Answer
1) The total NPV of lease will be equal to sum of present Value of annual lease payments and present value of bargain purchase option.
NPV of Lease = PV of Annual Lease Payments+PV of bargain purchase option
= [Annual lease Payments*PVAF(6, 6%)(beginning of year)]+[Purchase price*PVF(6 yrs, 6%)]
= ($100,000*5.212364)+($50,000*0.70496)
= $521,236+$35,248 = $556,484
2) Schedule of Lease Payments (Amounts in $)
3) Journal Entries (Amounts in $)
4) Journal Entry (Amounts in $)
Year (End) Lease Payable balance (A) Lease Payments (B) Interest Expense (C = A*6%) Decrease in Lease Payable (D = B - C) Closing Lease Payable (A-D) 0 556,484 100,000 0 100,000 456,484 1 456,484 100,000 27,389 72,611 383,873 2 383,873 100,000 23,032 76,968 306,905 3 306,905 100,000 18,414 81,586 225,319 4 225,319 100,000 13,520 86,480 138,839 5 138,839 100,000 8,331 91,669 47,170 Total 600,000 90,686 509,314Related Questions
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