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##### Calculate the amount of the total rental payment required.

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Ford Motor Credit agrees to lease a Ford Mustang to Bullitt Detective Agency, Inc. on Jan. 1, 2015. The following information relates to the lease agreement.;1. The term of the lease is 3 years non-cancelable, with 2 renewal options of one year each. The car has an expected life of 8 years.;2. Bullitt?s incremental borrowing rate is 5.5% apr. The implicit interest rate used by Ford is 4.3% apr and is known to Bullitt (after all, they are the best detective agency in San Francisco).;3. The cost of the car is \$19,500, and the fair value of the Mustang on 1/1/2015 is \$32,800.;4. At the end of the lease term, the Mustang reverts to Ford and has a guaranteed residual value of \$4,000. Bullitt depreciates all of its cars on a sum-of-the-years basis because it knows that cars lose most of their value in the first few years.;5. A termination penalty assures renewal of the lease for a period of 1 year after the expiration of the lease.;6. An option allowing Bullitt to extend the lease beyond the last renewal is exercised by Bullitt (Why give a Mustang back sooner than you have to?);7. The lease agreement requires equal 6-month payments beginning on Jan. 1, 2015.;8. Given the high probability of damaging a car leased to a detective agency, Ford decides to require Bullitt to purchase casualty insurance. The amount per 6 month?s is \$3000. The payment of the insurance is to be included in lease payment made every 6 months.;9. The collectability of the lease payments is reasonably predictable, and there is no important uncertainties surrounding the amount of costs to be incurred by the Ford.;Instructions;a. Tell me what kind of lease this is for both Bullitt and Ford. Be specific and give the reason why you think it is this type of lease.;b. Compute the present value of the minimum lease payments. (Hint: How do you handle the residual value?);c. Calculate the amount of the total rental payment required.;d. Prepare a lease amortization for Bullitt using the guaranteed residual value for 2015 and 2016. (Do not include the executory costs in your lease amortization schedule.);e. Prepare the journal entries Bullitt would make in 2015. Be sure to include any year end adjustments that need to be made.;f. Prepare the journal entries Ford would make in 2015.

Paper#19296 | Written in 18-Jul-2015

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