Question

Tamarisk Company leases an automobile with a fair value of $14,092 from John Simon Motors, Inc., on the following terms:

1. Non-cancelable term of 50 months.

2. Rental of $290 per month (at the beginning of each month).

3. Tamarisk guarantees a residual value of $1,220. Delaney expects the probably residual value to be $1,220 at the end of the lease term.

4. Estimated economic life of the automobile is 60 months.

5. Tamarisk's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown.

Part A)

What is the present value of the lease payments to determine the lease liability?

Part B)

Based on the original fact pattern, record the lease on Tamarisk's books at the date of commencement.

Part C)

Record the second month's lease payment.

Part D)

Record the first month's amortization on Tamarisk's books (assume straight-line).

Part E)

Suppose that instead of $1,220, Tamarisk expects the residual value to be only $500 (the guaranteed amount is still $1,220). How does the calculation of the present value of the lease payments change from part (a)?

Answer 1

Page No. A The Present Value of the Minimum Lease Payment 90 Amount Particulars Lease payment 1st Month 290 Add P.VIF @ 0.5% P.M( Remaining Month) (290x 43.364) 12,575.56 Add Poresent Value of $ 12207.783 955. 26 Present value of the minimum Lease (13820 Payment Present Value of minimum Lease Payment $ 13,820 is less than fair value at the automobile $ 14,092 So the record the lease of Tamarisk's Book at the Date of commencement $ 13820 month's The hease Present Value of Second payment x 290 x • 995 $288.55

Page No. A The Present Value of the Minimum Lease Payment 90 Amount Particulars Lease payment 1st Month 290 Add P.VIF @ 0.5% P.M( Remaining Month) (290x 43.364) 12,575.56 Add Poresent Value of $ 12207.783 955. 26 Present value of the minimum Lease (13820 Payment Present Value of minimum Lease Payment $ 13,820 is less than fair value at the automobile $ 14,092 So the record the lease of Tamarisk's Book at the Date of commencement $ 13820 month's The hease Present Value of Second payment x 290 x • 995 $288.55

(d) The Record fivest month's Amortization on Tamarisk's Book 13820 60 → $ 230,33 per month (③ computation of Present value of the Lease payments - Particulos Amount & Lease payment first month 290 Add PriF @ 0.5% pimi Remaining monon [Add Present Value al 500 X 9783 13915 12,575.58 Present value of Minimum Lease (13,257.08 payment