E21-2B (Lessee Computations and Entries; Capital Lease with Guaranteed Residual Value) Jupiter Corp. leases a rocket-themed amusement ride with a fair value of $110,000 on the following terms:
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October 8, 2019E21-2B (Lessee Computations and Entries; Capital Lease with Guaranteed Residual Value) Jupiter Corp. leases a rocket-themed amusement ride with a fair value of $110,000 on the following terms:
E21-2B (Lessee Computations and Entries; Capital Lease with Guaranteed Residual Value) Jupiter Corp. leases a rocket-themed amusement ride with a fair value of $110,000 on the following terms:
1. Noncancelable term of 10 years.
2. Rental of $16,000 per year (at the end of each year). The present value at 10% per year is $98,313.
3. Estimated residual value after 10 years is $10,000. The present value at 10% per year is $3,855.
Jupiter Corp. guarantees the residual value of $10,000.
4. Estimated economic life of the ride is 12 years.
5. Jupiter’s incremental borrowing rate is 10% a year. The lessor’s implicit rate is unknown.
Instructions
(a) What is the nature of this lease to Jupiter?
(b) What is the present value of the minimum lease payments?
(c) Record the lease on Jupiter’s books at the date of inception.
(d) Record the first year’s depreciation on Jupiter’s books. (Assume straight-line.)
(e) Record the first year’s lease payment.
