Delaney leases an automobile with a fair value of P10,000 from Simon motors onthe following terms:Non-cancellable term of 50 monthsRental of P200 per month (at the beginning of each month). The PV factor at 0.5% per month is 44.3635.Delaney guarantees a residual value of P1,180 (the present value at 0.5% per month is P920). Delaney expects the probable residual value to be P1,180 at the end of the lease term.Estimated economic life of the automobile is 60 months.Delaney’s incremental borrowing rate if 6%. Simon’s implicit rate is unknown.1. What is the present value of the lease payments to determine the lease liability?2. How much depreciation expense should be recorded for the first month?3. Suppose that instead of P1,180, Delaney expects the residual value to be only P500. How much will be the PV of lease payments?

Finance lease: It is a type of lease which has the ownership of asset with the finance company.…

Answered: Delaney leases an automobile with a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Delaney leases an automobile with a fair value of P10,000 from Simon motors on
the following terms:

Non-cancellable term of 50 months
Rental of P200 per month (at the beginning of each month). The PV factor at 0.5% per month is 44.3635.
Delaney guarantees a residual value of P1,180 (the present value at 0.5% per month is P920). Delaney expects the probable residual value to be P1,180 at the end of the lease term.
Estimated economic life of the automobile is 60 months.
Delaney’s incremental borrowing rate if 6%. Simon’s implicit rate is unknown.

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

2. How much depreciation expense should be recorded for the first month?

3. Suppose that instead of P1,180, Delaney expects the residual value to be only P500. How much will be the PV of lease payments?

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