Answer:
Explanation:
1. Suppose the instead of $8,250, Rauch expects the residual value at the end of the lease to be $5,000, but Donahue agrees to guarantee a residual value of $8,250. All other facts being eqaul, how would Rauch change the amount of the annual rental payments, if at all?
<em>A lower residual value means the car is expected to hold its value less (depreciate more) over the lease term. </em>
<em>Therefore, since most of the lease payment covers the cost of depreciation., more depreciation (or lower residual value) will most likely result into higher monthly payments over the lease term.</em>
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2. Explain how a fully guaranteed residual value by Donahue would change the accounting for Rauch, the lessor.
<em>The financial accounting term </em><em><u>guaranteed residual value</u></em><em> has to do with an additional payment made by a lessee in property, cash, or both at the termination of the lease. </em>
<em>Therefore since Guaranteed residual values are financial commitments made by the lessee, they are factored into the calculation of the minimum lease payment.</em>
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3. Explain how a bargain renewal option for one extra year at the end of the lease term would change the accounting of the lease for Rauch, the lessor.
<em>A bargain renewal option is a clause in a lease contract that gives the lessee the option of extension of the term of the lease at a substantially lower trate than the going market rate. </em>
<em>The presence of this clause in a lease contract will most likely imply that the lease will change to a finance lease rather than an operating lease</em>
