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21-2 Pat Delaney Company leases an automobile with a fair value of $8,725 from John Simon Motors, Inc., on the following terms.

1.  Noncancelable term of 50 months.

2.  Rental of $200 per month (at end of each month). (The present value at 1% per month is $7,840.)

3.  Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.) Pat Delaney guarantees the residual value of $1,180.

4.  Estimated economic life of the automobile is 60 months.

5.  Delaney incremental borrowing rate is 12% a year (1% a month). Simon implicit rate is unknown.

(a) What is the present value of the minimum lease payments

 (c) Record the lease on Delaney Company’s books at the date of inception. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(d) Record the first month’s depreciation on Delaney Company’s books (assume straight-line). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 15.)

 (e) Record the first 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. 15.)

Exercise 21-4             

 Castle Leasing Company signs a lease agreement on January 1, 2014, to lease electronic equipment to Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1 Jan Way has the option to purchase the equipment for $16,000 upon termination of the lease.            

2 The equipment has a cost and fair value of $160,000 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of $16,000.

3 Jan Way Company is required to pay $5,000 each year to the lessor for executory costs.            

4 Castle Leasing Company desires to earn a return of 10% on its investment.            

5 Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

 (a) Prepare the journal entries on the books of Castle Leasing to reflect the payments received under the lease and to recognize income for the years 2014 and 2015. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 0.527552 and the final answers to 0 decimal places e.g. 5,275.)

(b) Assuming that Jan Way Company exercises its option to purchase the equipment on December 31, 2015, prepare the journal entry to reflect the sale on Castle’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 0.527552 and the final answers to 0 decimal places e.g. 5,275.)

Exercise 21-8 (Essay)            

The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.            

Inception date:  1-May-14          

Annual lease payment due at the beginning of            

   each year, beginning with May 1, 2014  $21,227.65           

Bargain-purchase option price at end of lease term  $4,000.00           

Lease term  5 years         

Economic life of leased equipment  10 years         

Lessor’s cost  $65,000.00           

Fair value of asset at May 1, 2014  $91,000.00           

Lessor’s implicit rate  10 %         

Lessee’s incremental borrowing rate  10 %         

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs

Discuss the nature of this lease to Rode Company            

Exercise 21-8             

The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.             

Inception date:         1-May-14    

Annual lease payment due at the beginning of             

   each year, beginning with May 1, 2014         $21,227.60     

Bargain-purchase option price at end of lease term         $4,000     

Lease term         5  years   

Economic life of leased equipment         10 years   

Lessor’s cost         $65,000     

Fair value of asset at May 1, 2014         $91,000     

Lessor’s implicit rate         10 %   

Lessee’s incremental borrowing rate         10 %   

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

Prepare a lease amortization schedule for Rode Company for the 5-year lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25125 and Round answers to 2 decimal places, e.g. 15.25.)

Exercise 21-13             

On January 1, 2014, a machine was purchased for $900,000 by Young Co. The machine is expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to St. Leger Inc. on January 1, 2014, at an annual rental of $210,000. Other relevant information is as follows.

1   The lease term is for 3 years.            

2   Young Co. incurred maintenance and other executory costs of $25,000 in 2014 related to this lease.            

3   The machine could have been sold by Young Co. for $940,000 instead of leasing it.            

4   St. Leger is required to pay a rent security deposit of $35,000 and to prepay the last month’s rent of $17,500.            

(a) How much should Young Co. report as income before income tax on this lease for 2014?             

 (b) What amount should St. Leger Inc. report for rent expense for 2014 on this lease?