Question

For the questions from 12 to 16) Athena Company has a machine with a fair market value of $760,000, which is leased to Nobu Company on January 1, 2014. The lease term has 7 years and its expected useful life is 8 year The machine is estimated to have a guaranteed residual value of $76,000 at the end of 7 years The residual value at the end of the lease term is expected to be $76,000. The lease agreement requires the lessee to pay equal annual rental payments on January I. The Nobu's incremental borrowing rate is 10%. The Athena's implicit interest rate is 12% and it is known to the lessee. What is the amount of annual rental payment? a. $130,917 b. $148,687 c. $134,634 d. $141,961 12. 13. What is the amount the lessee must capitalize on January 1, 2014? a. $ 725,621 b. $ 721,000 c. $ 760,000 d. $ 760,238 14. What is the journal entry the lessee must make on January 1, 2014? a. Cash is debited. b. Accumulated Depreciation is credited. c. Lease Liability is credited. d. None of the above is correct. 15. What is the journal entry the lessee must make on December 31, 2014 a. Cash is debited. b. Accumulated Depreciation is credited. c. Lease Liability is credited. d. None of the above is correct.

Answer 1

12)Fair value =[PVAD12%,7*Annual rental payment ]+[PVF12%,7*Guaranteed residual value]

    760000 =[5.11141*Annual rental payment ]+ [.45235*76000]

     760000 = [5.11141*Annual rental payment ]+ 34378.6

     760000-34378.6 = [5.11141*Annual rental payment ]

       Annual rental payment = 725621.4/5.11141

                              = $ 141961

Correct option is "d"

**find present value annuity due factor and present value factor from their table respectively or using financial calculator.

13)correct option is "c"-760000

The amount to capitalize is equals to $ 760000 which is equal to fair market value of asset .

14)correct option is "c"

Account title	debit	credit
Right to use asset	xxx
Lease liability		xxx

15)

correct option is "b"

Account title	debit	credit
Depreciation expense	xxx
Accumulated depreciation- right of use asset		xxx