E21-2B (Lessee Computations and Entries; Capital Lease with Guaranteed Residual
ID: 2761789 • Letter: E
Question
E21-2B (Lessee Computations and Entries; Capital Lease with Guaranteed Residual Value) Jupiter Corp. leases a rocket-themed amusement ride with a fair value of $110,000 on the following terms: 1. Noncancelable term of 10 years. 2. Rental of $16,000 per year (at the end of each year). The present value at 10% per year is $98,313. 3. Estimated residual value after 10 years is $10,000. The present value at 10% per year is $3,855. Jupiter Corp. guarantees the residual value of $10,000. 4. Estimated economic life of the ride is 12 years. 5. Jupiter’s incremental borrowing rate is 10% a year. The lessor’s implicit rate is unknown. Instructions (a) What is the nature of this lease to Jupiter? (b) What is the present value of the minimum lease payments? (c) Record the lease on Jupiter’s books at the date of inception. (d) Record the first year’s depreciation on Jupiter’s books. (Assume straight-line.) (e) Record the first year’s lease payment.
Explanation / Answer
a) Lease life = 10 years, economic life = 12%
Lease life is (10/12*100) = 83.335 which is more than the 75% required to be a capital lease.
Answer is Capital Lease
b. Present value of the minimum lease payments = Present value of 10 rental payments of $16,000 per year + Present value of residual value = $98,313.30 + $3,855 = $102,168
c. Journal Entry on teh date of inception:
Leased Equipment Dr $110,000
Lease Obligation $110,000
d. First year Depreciation:
Amount of depreciation = $98,313.3/10 = $9,831
Depreciation Expense Dr $9,831
Accumulated Depreciation- Capital Lease $9,831
e. First Year lease payment
Amount of interest expense = 10% of Present value of the minimum lease payments = 10% of $102,168 = $10,217
Journal entry:
Lease Liability Dr $5,783
Interest Expense Dr $10,217
Cash $16,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.