Question
A 3-year lease is initiated on January 1, 2017 for equipment with an expected useful life of 6 years. The Lessor is Supreme Asset Management
A 3-year lease is initiated on January 1, 2017 for equipment with an expected useful life of 6 years. The Lessor is Supreme Asset Management Company (SAMC) and the lessee is Bogue Distributors Limited (BDL). The equipment reverts to SAMC upon expiration of the lease agreement. Three Payments are due to SAMC in the amount of $180,000 per year beginning December 31, 2017. An additional sum of $12,000 is to be paid annually by BDL for insurance. BDL guarantees a $20,000 residual value on December 31, 2019 to SAMC. The leased asset is expected to also have a $20,000 salvage value on December 31, 2019; therefore, the asset should be depreciated down to the $20,000 expected residual value. The lessees incremental borrowing rate is 14% (and the lessors implicit rate is 12%).
PVIFA 14% PVIFA 12%
Year 1 0.8772 0.8929
Year 2 0.7695 0.7972
Year 3 0.6750 0.7118
Required:
1.Record all the journal entries in the books of the BDL over the life of the lease (supported by the relevant calculations).
2. What are the total cash payments made by the BDL over the life of the lease?
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