Exercise 21A3 ag Shamrock Company leases an automobile with

Exercise 21A-3 a-g Shamrock Company leases an automobile with a fair value of $18,013 from John Simon Motors, Inc., on the following terms: Non-cancelable term of 50 months. Rental of $370 per month (at the beginning of each month). (The present value at 0.5% per month is $16,415.) Shamrock guarantees a residual value of $1,600 (the present value at 0.5% per month is $1,247). Shamrock expects the probable residual value to be $1,600 at the end of the lease term. Estimated economic life of the automobile is 60 months. Shamrock\'s incremental borrowing rate is 6% a year (0.5% a month). Simon\'s implicit rate is unknown. 1. 2. 3. 4. 5. Click here to view the factor table (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What is the nature of this lease to Shamrock? The nature of this lease is a/an lease What is the present value of the lease payments to determine the lease liability? (Round answer to 0 decimal places, e.g. 5,275.) Present value of the lease payments Based on the original fact pattern, record the lease on Shamrock\'s books at the date of commencement. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit

Solution

1.The nature of the lease to SHAMROCK \"FINANCE LEASE\".

As it is non cancelable.the focus is on the recovery and interest.the lessor qill act as financier and here he will not bear any repair cost.

2. Lease payment = $8,822

lease rent(working note1)  

+ terminal value (working note 2) => $1560

Therefore cost of leasing = $10,382

Working notes:

1. Lease rent- $370* 4.9256 = $ 8,822.

(present value factor of year1=0.9950 , year2 = 0.9900, year 3= 0.9851, year 4 = 0.9802, year 5 = 0.9753

Sum of all present value factor = 4.9256)

2. Terminal value = $1600* 0.9753 = $1,560.