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Lessee-Lessor Entries




Question;Lessee-Lessor Entries;(30 points);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.;Lease work space


Paper#39403 | Written in 18-Jul-2015

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