Super Speeders (SS) signs a 3-year lease contract with Turbo Tomas (TT) on January 1, 20X1...
Super Speeders (SS) signs a 3-year lease contract with Turbo Tomas (TT) on January 1, 20X1 to lease a Honda civic.
The terms of the lease are as follows:
-Semi-annual payments of $5,000 at the start of each period.
- Option to purchase the Civic for $3,000 after 4th payment.
Super Speeders has an annual incremental borrowing rate of 9%.
Turbo Tomas guarantees a residual value on the asset of $4,000.
Super Speeders had to pay $800 in legal fees to finalize the contract.
What type of lease is this?
What journal entry should Super Speeders record for the inception of the lease?
What journal entry should Super Speeders record at 12/31/20X1?
Homework Answers
Type of lease :
It is a Finance lease or capital lease.
Because of the following reasons.
Lesse has an option to purchase ,- Option to purchase the civic after 4th payment.
Expenses are borne by lessee - Legal expenses are paid by super speeders
Above parameters are not exclusive. There are other parameters to determine whether a lease is operating or finance
Based on the informaation given, the above lease is finance lease or Capital lease (US GAAP)
Journal entry at the inception of lease:
At the inception of lease,Present value of minimum lease payments to be recorded as both asset and liability.
01/01/20x1 In the boooks of Super speeders [ lessee ]
Leased asset $ 19,242
leased liability $19,242
Working :
Lease period = 3 years
Lease payments = Semi annually @ $3,000 , rate = 9%
No of periods = 3 years x 2 = 6 , interest rate per period = 4.5%
Present value to be calculated for only 5 periods because lease payments are to be made at start of each period.
| Guaranteedresidual amount at the end of the year 7 | 4,000 | |||
| PVF @4.5% at the end of 6th period | 0.76789 | |||
| Present value of guaranteed residual amount | 3,072 | |||
| Present value of semi annual lease payment | 13,170 | |||
| PVF @4.5% for 5 periods = 4.38997 | ||||
| Lease payment at the inception of lease | 3,000 | |||
| Total present valueof lease payment | 19,242 | |||
Entry on 12/31/20x1
Lease liability $2,730
Interest expense[ 3,000 x 9% ] 270
Cash $3,000
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