Schrute Company leases an automobile with a fair value of $15,005 from Rainn, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $300 per month (at the beginning of each month). 3. Schrute guarantees a residual value of $1,800 (the present value at 0.5% per month is $1,403). The expected residual value is estimated to be $1,800 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Schrute’s incremental borrowing rate is 6% a year (0.5% a month). Rainn’s implicit rate is unknown. Present Value of an Annuity Due with 0.5% and 60 periods: 51.98419 Present Value of an Ordinary Annuity at 0.5% and 60 periods: 48.17337352 Present Value of an Annuity Due with 0.5% and 50 periods: 44.36350 Present Value of an Ordinary Annuity with 0.5% and 50 Periods:41.56644707 The entry to record the first month’s lease payment (at commencement of the lease) would include: a) a debit to interest expense in the amount of $300. b) a credit to lease liability in the amount of $300. c) a debit to the cash account in the amount of $300. d) a debit to the lease liability account in the amount of $300.
Schrute Company leases an automobile with a fair value of $15,005 from Rainn, Inc., on the following terms:
1. Non-cancelable term of 50 months.
2. Rental of $300 per month (at the beginning of each month).
3. Schrute guarantees a residual value of $1,800 (the present value at 0.5% per month is $1,403). The expected residual value is estimated to be $1,800 at the end of the lease term.
4. Estimated economic life of the automobile is 60 months.
5. Schrute’s incremental borrowing rate is 6% a year (0.5% a month). Rainn’s implicit rate is unknown.
Present Value of an Annuity Due with 0.5% and 60 periods: 51.98419
Present Value of an Ordinary Annuity at 0.5% and 60 periods: 48.17337352
Present Value of an Annuity Due with 0.5% and 50 periods: 44.36350
Present Value of an Ordinary Annuity with 0.5% and 50 Periods:41.56644707
The entry to record the first month’s lease payment (at commencement of the lease) would include:
a)
a debit to interest expense in the amount of $300.
b)
a credit to lease liability in the amount of $300.
c)
a debit to the cash account in the amount of $300.
d)
a debit to the lease liability account in the amount of $300.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
