1 answer

Skysong Company leases an automobile with a fair value of $18,680 from John Simon Motors, Inc.,...

Question:

Skysong Company leases an automobile with a fair value of $18,680 from John Simon Motors, Inc., on the following terms:

1. Non-cancelable term of 50 months.
2. Rental of $380 per month (at the beginning of each month).
3. Skysong guarantees a residual value of $1,870. Delaney expects the probable residual value to be $1,870 at the end of the lease term.
4. Estimated economic life of the automobile is 60 months.
5. Skysong’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.

What is the present value of the lease payments to determine the lease liability? (Round answer to 0 decimal places, e.g. 5,275.)

Present value of the lease payments????

Answers

PV of monthly lease rent = $16859 (Note 1)

PV of guaranteed residual value = $1457 (Note 2)

Present value(PV) of lease payment = PV of monthly payment + PV of guaranteed residual value = $16859+$1457 =$18316

Working Notes

Note 1 - Calculation of Present Value of Monthly Lease rent is as follows (for first month PV factor is 1 because payment is made at the beginning)

Month Cash flow at the beginning of month (A) Pv factor @ 0.5% per month (B) Discounted cash flow (A x B)
1 $380.00                            1.00000 $380.00
2 $380.00                            0.99502 $378.11
3 $380.00                            0.99007 $376.23
4 $380.00                            0.98515 $374.36
5 $380.00                            0.98025 $372.49
6 $380.00                            0.97537 $370.64
7 $380.00                            0.97052 $368.80
8 $380.00                            0.96569 $366.96
9 $380.00                            0.96089 $365.14
10 $380.00                            0.95610 $363.32
11 $380.00                            0.95135 $361.51
12 $380.00                            0.94661 $359.71
13 $380.00                            0.94191 $357.92
14 $380.00                            0.93722 $356.14
15 $380.00                            0.93256 $354.37
16 $380.00                            0.92792 $352.61
17 $380.00                            0.92330 $350.85
18 $380.00                            0.91871 $349.11
19 $380.00                            0.91414 $347.37
20 $380.00                            0.90959 $345.64
21 $380.00                            0.90506 $343.92
22 $380.00                            0.90056 $342.21
23 $380.00                            0.89608 $340.51
24 $380.00                            0.89162 $338.82
25 $380.00                            0.88719 $337.13
26 $380.00                            0.88277 $335.45
27 $380.00                            0.87838 $333.78
28 $380.00                            0.87401 $332.12
29 $380.00                            0.86966 $330.47
30 $380.00                            0.86533 $328.83
31 $380.00                            0.86103 $327.19
32 $380.00                            0.85675 $325.56
33 $380.00                            0.85248 $323.94
34 $380.00                            0.84824 $322.33
35 $380.00                            0.84402 $320.73
36 $380.00                            0.83982 $319.13
37 $380.00                            0.83564 $317.55
38 $380.00                            0.83149 $315.97
39 $380.00                            0.82735 $314.39
40 $380.00                            0.82323 $312.83
41 $380.00                            0.81914 $311.27
42 $380.00                            0.81506 $309.72
43 $380.00                            0.81101 $308.18
44 $380.00                            0.80697 $306.65
45 $380.00                            0.80296 $305.12
46 $380.00                            0.79896 $303.61
47 $380.00                            0.79499 $302.10
48 $380.00                            0.79103 $300.59
49 $380.00                            0.78710 $299.10
50 $380.00                            0.78318 $297.61
. . Total $16,859.

Present Value of Lease rentals= $16859

Note 2 - Calculation of Present value of Guaranteed residual value

Present value factor for payment at the end of 50th month at 0.50% = 0.77929

PV of Guaranteed residual value = $1870 x 0.77929 = $1457

.

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