Question

Marin enters into an agreement with Traveler Inc. to lease a car on December 31, 2019. The following information relates to this agreement.
1.The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option. The remaining economic life of the car is 3 years, and it is expected to have no residual value at the end of the lease term.2.The fair value of the car was $15,540 at commencement of the lease.
3.Annual payments are required to be made on December 31 at the end of each year of the lease, beginning December 31, 2020. The first payment is to be of an amount of $5,752.82, with each payment
increasing by a constant rate of 5% from the previous payment (i.e., the second payment will be $6,040.46 and the third and final payment will be $6,342.48).
4.Marin’ incremental borrowing rate is 8%. The rate implicit in the lease is unknown.

Answer 1

Solution:

Date                Account Titles & Explanation                 Debit       Credit  

12/31/2019                 Leased Car                                    18,780

                                Lease Liability                                              18,780.00  

(Initial recording of leased car at fair value)  

12/31/2020              Interest Expense                           1,502.40

                                   Lease Liability                            5,449.60

                                       Cash                                                       6,952.00

(Interest expenses and payment recorded)  

12/31/2020        Depreciation Expense on Car             6,260.00

                    Accumulated Depreciation on Car                           6,260.00

(Depreciation recognized on leased car)

12/31/2021               Interest Expense                          1,066.43

                                 Lease Liability                              6,233.17

                                   Cash                                                           7,299.60

(Interest expenses and payment recorded)

12/31/2018          Depreciation Expense on Car           6,260.00

                      Accumulated Depreciation on Car                         6,260.00

(Depreciation recognized on leased car)  

Calculation of Interest  

Date         Cash Payment       Interest Expense       Lease Liability

12/31/2016                                                                    18,780.00

12/31/2017     6,952.00               1,502.40                  13,330.40

12/31/2018        7,299.60             1,066.43                  7,097.23

12/31/2019         7,664.58              567.78                           0.43  

Depreciation as per SIM method Depreciation

= Fair Value of Asset / Useful life Depreciation = 18780/3 = 6260