4. 1. 2. 3. C10-35 Required LANGSTON STACEY, INC. Accounting for an Automobile Lease with a Residual Value Deficiency Clause Langston Stacey, Inc. recently entered into an agreement to lease a new 20X1 luxury automobile from Shiretown Motors. The fair market value of the automobile was $40,000 at the inception of the lease. Significant terms of the lease are as follows: Langston Stacey estimates that the economic life of the leased automobile is three or four years. Langston has requested from Shiretown the implicit rate of interest used in the lease, but Shiretown has refused to make that information available. Langston's incremental borrowing rate is 1 percent per month, which approximates the actual implicit rate in the lease. The lease is for 18 months. The monthly rental payable at the end of every month is $1,284. The lessee is responsible for insurance, maintenance, and taxes. The lessee at the end of the lease will be required to make up any residual value deficiency on the automobile between $9,333 and $22, 666, or a maximum of $13,333. The lessee is limited to 24,000 miles driven over the 18 months. The lessee will pay an additional charge of 25 per mile for all miles in excess of the 24,000 mile limit. Discuss from the standpoint of each party how it should account for the lease and why. Did your response to question 1 appear to meet the objectives of the GAAP for leases as established by the FASB? Discuss how the parties should account for the lease if, instead of requiring Langston to make up any residual value deficiency, the lease required Langston to pay a fee to an unrelated third party to guarantee a $22,666 residual at the conclusion of the lease. Why would Shiretown Motors be willing to agree to the residual value deficiency clause, which holds Langston Stacey potentially liable for only a maximum of $13,333?

C10-35 LANGSTON STACEY, INC. Accounting for an Automobile Lease with a Residual Value Deficiency Clause Langston Stacey, Inc. recently entered into an agreement to lease a new 20x1 luxury automobile from Shiretown Motors. The fair market value of the automobile was $40,000 at the inception of the lease. Significant terms of the lease are as follows: The lease is for 18 months. The monthly rental payable at the end of every month is $1,284. The lessee is responsible for insurance, maintenance, and taxes. The lessee at the end of the lease will be required to make up any residual value deficiency on the automobile between $9,333 and $22,666, or a maximum of $13,333. The lessee is 1 imited to 24,000 miles driven over the 18 months. The lessee will pay an additional charge of 25c per mile for all miles in excess of the 24,000 mile 1 imit. Langston Stacey estimates that the economic life of the leased automobile is three or four years. Langston has requested from Shiretown the implicit rate of interest used in the lease, but Shiretown has refused to make that information available. Langston's incremental borrowing rate is 1 percent per month, which approximates the actual implicit rate in the lease. Required 1. Discuss from the standpoint of each party how it should account for the lease and why. 2. Did your response to question 1 appear to meet the objectives of the GAAP for leases as established by the EASB? 3. Discuss how the parties should account for the lease if, instead of requiring Langston to make up any residual value deficiency, the lease required Langston to pay a fee to an unrelated third party to guarantee a $22,666 residual at the conclusion of the lease. 4. Why would Shiretown Motors be willing to agree to the residual value deficiency clause, which holds Langston Stacey potentially liable for only a maximum of $13,333