Question

Truck Leasing Company (TLC) buys trucks for leasing to various delivery companies. On April 1, 2010, TLC leases a truck to Showman Delivery Company. The cost of the truck of $289,875 and its fair value were the same. The lease payments stipulated in the lease are $40,000 per year in advance for the 10-year period of the lease. The expected economic life of the equipment is also 10 years. The title to the equipment remains in the hands of TLC at the end of the lease term, although only nominal residual value is expected at that time. Showman incremental borrowing rate is 5%, and it uses the straight-line method of depreciation on all owned equipment. Both Showman and TLC have fiscal year ending March 31, while lease payments are made on April 1 each year. Required:

a. Determine the rate implicit in the lease

b. Determine the present value of the minimum lease payments for the lessee.

c. Prepare the entries to record the lease and the first lease payment on the books of the lessor and lessee, assuming the lease meets the criteria of a direct financing lease for the lessor and a capital lease for the lessee.

d. Other than those at (c ) above, prepare all entries required to account for the lease on both the lessee’s and lessor’s books for the fiscal year 2011.

Answer 1

Answers Pageino : @ Rate implicit in the lease Case Het present value at lower rale = y car o amount + Yearlona) amount -(145410 - 289875 + yooo0 X X = - 289875 + (40,000 X 81108) = -289875 + 324320 = $34445 Net present value at higher cratc -289875+ 40,000 x 1 - 1400 10yXitoy 3*289875 + (40,000 X 6'76) 2-$289875 + 240400 a -$19475 IRR - lower rate ta i NAV at lower crate APV at lower rate a Npw at higher rate

Page No @ s 51. 34445 ( 34445 +19475) - 544 34445 53920 5%. + 0.64% = 51644 TRR = 5,64%. nument : Present value g Hinimum lease payment for the lessee = 10,000 x ! - (1+5:64%) Frit51647) 564% = 40,000 $7.91 = $316400 iPresent value of minimum (ease payment for the Lessee - $316400 @ the value of machine to be recognized lower value of Present value of minimum' lease payment 10, $316400

Page, ao ③ and face value ies $289875 is value of the machine = $089875 @ Credit Journal entries Date Particular April i Truck on lease alc To truck leasing company 1 Truck Leasing company To bank Debit $289875 2010 6289875 April, $40,000 2010 $40,000