At 17 years old, Otto signed a contract to purchase a new Hummer by advancing a payment of $50,000. However, when Otto turned 20
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<u>Solution and Explanation:</u>
Calculation of Minimum lease annual payments from (MLP)
Year MLP from lessor Present value Present valur of
point of view factor 8% cash flows
1 $4,703 $4,350.28
2 $4,703 $4,030.47
3 $4,703 $3,729.48
4 $4,703 $3,456.71
5 $4,703 $3,198.04
Total of Minimum
lease Payments $23,515 $ 18,764.97
Add
Unguaranteed
residual value(ugrv) 4000 $2,720.00
Asset to be recorded
in the books of lessor
(sum of mlp +ugrv) $27,515 $ 21,484.97
Here
Gross Investment=$27515
Lease receivable recorded in in the books of lessor(Phelps)(Mimum lease payments + Unguaranteed residual )value = $21484 $21,484
Walsh (lessee) shoiuld be recorded the amount of present value of minimum lease payments + Guaranteed Residual value=$18764.97 as asset and liabilty
b) In the books of phelps (lessor)
2017.01.01 Lease Recievble from walsh ….Dr $21,484
to Asset $21,484
(Being Lease receivable recorded )
In the books of Walsh (lessee)
2017.01.01 Asset ac ……………Dr $18,764
to Lease Liabilty(Lessor) $18,764
(Being the asset and liabilty recorded )
2017.12.31 Depreciation ……Dr 3752
to Asset 3752
(Beint Depreciation recorded charged during the year recorded 18764/5 provided for 5 years)
Here annual payment started from the at the beginning of year i.e annual lease payments start from 01.01.2018.
c) If expected residual value of $4000 is guaranteed by walsh no changes will be made in classification of lease and there is no chages in asset recorded in Lessor books. But changes will be made in the books of lessee as present value of guaranteed residual value should be added to asset I.e $18764+Present vlue of $4000 $18764+2720=21484
d) If expected residual value of $3000 is guaranteed by walsh no changes will be made in classification of lease and there is no chages in asset recorded in Lessor books But changes will be made in the books of lessee as present value of guaranteed residual value should be added to asset I.e $18764+Present vlue of $3000 $18764+$2040=$20804