Question

Exercise 21-03

Metlock Company leases an automobile with a fair value of $11,845 from John Simon Motors, Inc., on the following terms:

1.		Non-cancelable term of 50 months.
2.		Rental of $240 per month (at the beginning of each month).
3.		Metlock guarantees a residual value of $1,240. Delaney expects the probable residual value to be $1,240 at the end of the lease term.
4.		Estimated economic life of the automobile is 60 months.
5.		Metlock’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.

(a) Record the second month’s lease payment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

(b) Record the first month’s amortization on Metlock’s books (assume straight-line). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.25.)

(c) Suppose that instead of $1,240, Metlock expects the residual value to be only $500 (the guaranteed amount is still $1,240). How does the calculation of the present value of the lease payments change from part (b)? (Round answer to 0 decimal places, e.g. 5,275.)

Answer 1

Required a

Journal for 2nd month lease payment

Particulars	Debit	Credit
Lease Liability	$         240.00
Cash		$       240.00

Required b

Calculation of Lease libility:

Lease Liability = $240 * PV-AD(0.5%, 50) + $1240 * PV(0.5%, 50)

= $240 * 44.36350 + $1240 * 0.78318

= $11,618

Required c

Since the amount of guranteed residual is still $1240, the Present value of lease liability would not change even though Metlock expects the residual value to be $500.

This is because, there is no change in the amount to be paid by Metlock to the lessor.

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