Week 5 assignment exercise 21-2 pat delaney company

Exercise 21-2

Pat Delaney Company leases an automobile with a fair value of $8,725 from John Simon Motors, Inc., on the following terms.

1.

 

Noncancelable term of 50 months.

2.

 

Rental of $200 per month (at end of each month). (The present value at 1% per month is $7,840.)

3.

 

Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.) Delaney Company guarantees the residual value of $1,180.

4.

 

Estimated economic life of the automobile is 60 months.

5.

 

Delaney Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown.

Warning

 

Exercise 21-8

The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.

Inception date:

 

May 1, 2014

 

Annual lease payment due at the beginning of

     

   each year, beginning with May 1, 2014

 

$21,227.60

 

Bargain-purchase option price at end of lease term

 

$4,000

 

Lease term

 

years

Economic life of leased equipment

 

10

years

Lessor’s cost

 

$65,000

 

Fair value of asset at May 1, 2014

 

$91,000

 

Lessor’s implicit rate

 

10

%

Lessee’s incremental borrowing rate

 

10

%


The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

 

Prepare a lease amortization schedule for Rode Company for the 5-year lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25125 and Round answers to 2 decimal places, e.g. 15.25.)

RODE COMPANY (Lessee)
Lease Amortization Schedule

Date

 

Annual Lease Payment Plus
BPO

 

Interest on
Liability

 

Reduction of Lease
Liability

 

Lease Liability

5/1/14

             

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5/1/14

 

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5/1/15

 

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5/1/16

 

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5/1/17

 

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5/1/18

 

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4/30/19

 

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Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2014 and 2015. Rode’s annual accounting period ends on December 31. Reversing entries are used by Rode. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.)

Date

Account Titles and Explanation

Debit

Credit

5/1/14

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(To record the lease.)

   
 

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(To record the first lease payment.)

   

12/31/14

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(To To record interest.)

   
 

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(To record depreciation.)

   

1/1/15

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5/1/15

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12/31/15

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(To record interest.)

   
 

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(To record depreciation.)

   

 

Exercise 21-13

On January 1, 2014, a machine was purchased for $900,000 by Young Co. The machine is expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to St. Leger Inc. on January 1, 2014, at an annual rental of $210,000. Other relevant information is as follows.

1.

 

The lease term is for 3 years.

2.

 

Young Co. incurred maintenance and other executory costs of $25,000 in 2014 related to this lease.

3.

 

The machine could have been sold by Young Co. for $940,000 instead of leasing it.

4.

 

St. Leger is required to pay a rent security deposit of $35,000 and to prepay the last month’s rent of $17,500.


(a) How much should Young Co. report as income before income tax on this lease for 2014?

Income before income tax

 

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(b) What amount should St. Leger Inc. report for rent expense for 2014 on this lease?

Rent expense

 

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