FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Question
DU Journeys enters into an agreement with Traveler plc to lease a used car on December 31, 2021. The following information relates to this agreement.
1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option. The remaining economic life of the used car is 3 years, and it is expected to have no residual value at the end of the lease term.
2. The fair value of the car was £15,000 at commencement of the lease.
3. Annual payments are made on December 31 at the end of each year of the lease, beginning December 31, 2022. The first payment is £5,552.82, with each payment increasing by a constant rate of 5% from the previous payment.
4. DU Journeys’ incremental borrowing rate is 8%. Traveler plc’s rate implicit in the lease is unknown.
5. DU Journeys uses straight-line
Instruction
a. Prepare DU Journeys’
[Hint: DU Journeys recognizes the lease asset and liability on Dec 31, 2021]
b. Assume that, instead of a constant rate of increase, the annual lease payments will increase according to a price index determined by the concurrent market conditions. At its current level, the price index stipulates that the first rental payment should be £5,820. What would be the impact on the journal entries made by DU Journeys at commencement of the lease, as well as for subsequent years?
|
|
PV of an ordinary annuity |
PV of an annuity due |
PV of a single sum |
|
(n) |
8% |
8% |
8% |
|
1 |
0.92593
|
1.00000
|
0.92593 |
|
2 |
1.78326
|
1.92593
|
0.85734 |
|
3 |
2.57710 |
2.78326
|
0.79383 |
![DU Journeys enters into an agreement with Traveler plc to lease a used car on December 31,
2021. The following information relates to this agreement.
1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option.
The remaining economic life of the used car is 3 years, and it is expected to have no residual
value at the end of the lease term.
2. The fair value of the car was £15,000 at commencement of the lease.
3. Annual payments are made on December 31 at the end of each year of the lease, beginning
December 31, 2022. The first payment is £5,552.82, with each payment increasing by a
constant rate of 5% from the previous payment.
4. DU Journeys' incremental borrowing rate is 8%. Traveler plc's rate implicit in the lease is
unknown.
5. DU Journeys uses straight-line depreciation for all similar cars.
Instruction
a. Prepare DU Journeys’ journal entries for 2021, 2022, and 2023 (To simplify the calculation,
round the amount of lease liability to the nearest integral)
[Hint: DU Journeys recognizes the lease asset and liability on Dec 31, 2021]
b. Assume that, instead of a constant rate of increase, the annual lease payments will increase
according to a price index determined by the concurrent market conditions. At its current
level, the price index stipulates that the first rental payment should be £5,820. What would be
the impact on the journal entries made by DU Journeys at commencement of the lease, as
well as for subsequent years?
PV of an annuity
PV of a single
PV of an ordinary
annuity
due
sum
(n)
Periods
8%
8%
8%
0.92593
1.00000
1
0.92593
1.78326
1.92593
2
0.85734
2.78326
3
2.57710
0.79383](https://content.bartleby.com/qna-images/question/9a0bf67c-5d01-4325-8404-6267a4988d03/4ff511dc-01ab-46a5-b3cd-34e915a06d1a/o6gzog7_processed.jpeg)
Transcribed Image Text:DU Journeys enters into an agreement with Traveler plc to lease a used car on December 31,
2021. The following information relates to this agreement.
1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option.
The remaining economic life of the used car is 3 years, and it is expected to have no residual
value at the end of the lease term.
2. The fair value of the car was £15,000 at commencement of the lease.
3. Annual payments are made on December 31 at the end of each year of the lease, beginning
December 31, 2022. The first payment is £5,552.82, with each payment increasing by a
constant rate of 5% from the previous payment.
4. DU Journeys' incremental borrowing rate is 8%. Traveler plc's rate implicit in the lease is
unknown.
5. DU Journeys uses straight-line depreciation for all similar cars.
Instruction
a. Prepare DU Journeys’ journal entries for 2021, 2022, and 2023 (To simplify the calculation,
round the amount of lease liability to the nearest integral)
[Hint: DU Journeys recognizes the lease asset and liability on Dec 31, 2021]
b. Assume that, instead of a constant rate of increase, the annual lease payments will increase
according to a price index determined by the concurrent market conditions. At its current
level, the price index stipulates that the first rental payment should be £5,820. What would be
the impact on the journal entries made by DU Journeys at commencement of the lease, as
well as for subsequent years?
PV of an annuity
PV of a single
PV of an ordinary
annuity
due
sum
(n)
Periods
8%
8%
8%
0.92593
1.00000
1
0.92593
1.78326
1.92593
2
0.85734
2.78326
3
2.57710
0.79383
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