PROBLEM 2 On 1/1//2015, XYZ leases a machine from Super LeaseCo for two years. Super LeaseCo can purchase the machine for $340,000 but estimates that the retail sales value (i.e. fair value) of the machine is 400,000. Super Lease Co estimates that the machine will be worth $20,000 after two year, and has priced the lease using an implict rate of 5%. The annual lease payment is $195,586, payable at the BEGINNING of each year (1/1/15 and 12/31/15) XYZ does NOT know Super LeaseCo's implict rate and normally borrows money at 6%. They estimate that the fair value of the machine is $397,903. The machine has a useful life of 4 years, with no salvage value at the end of those 4 years. XYZ records amortization using the straight-line method. Required - Prepare all required journal entries for XYZ and Super LeaseCo under the following independent assumptions: (Round all numbers to the nearest dollar) Assumption 1. Assume that XYZ estimates that the residual value of the machine at the end of the lease will be $20,000 and they have agreed to guarantee a residual value of $20,000. You should also assume that the asset is returned to Super LeaseCo on 12/31/16 and that its actual fair value at that date is only S15.000. As a result, XYZ must pay an additional $5,000 at the end of the lease. Assumption 2. Assume that XYZ estimates that the residual value of the machine at the end of the lease will be $180,000 and they have agreed to guarantee a HIGHER residual value of $20,000. You should also assume that the asset is returned to Super LeaseCo on 12/31/16 and that its actual fair value at that date is only $15,000. As a result, XYZ must pay an additional $5,000 at the end of the lease. Assumption 3. Assume that XYZ has NOT guaranteed any residual value. You should assume that the asset is returned to Super LeaseCo on 12/31/16 and that its actual fair value at that date is $15,000 PROBLEM 2 On 1/1//2015, XYZ leases a machine from Super LeaseCo for two years. Super LeaseCo can purchase the machine for $340,000 but estimates that the retail sales value (i.e. fair value) of the machine is 400,000. Super Lease Co estimates that the machine will be worth $20,000 after two year, and has priced the lease using an implict rate of 5%. The annual lease payment is $195,586, payable at the BEGINNING of each year (1/1/15 and 12/31/15) XYZ does NOT know Super LeaseCo's implict rate and normally borrows money at 6%. They estimate that the fair value of the machine is $397,903. The machine has a useful life of 4 years, with no salvage value at the end of those 4 years. XYZ records amortization using the straight-line method. Required - Prepare all required journal entries for XYZ and Super LeaseCo under the following independent assumptions: (Round all numbers to the nearest dollar) Assumption 1. Assume that XYZ estimates that the residual value of the machine at the end of the lease will be $20,000 and they have agreed to guarantee a residual value of $20,000. You should also assume that the asset is returned to Super LeaseCo on 12/31/16 and that its actual fair value at that date is only S15.000. As a result, XYZ must pay an additional $5,000 at the end of the lease. Assumption 2. Assume that XYZ estimates that the residual value of the machine at the end of the lease will be $180,000 and they have agreed to guarantee a HIGHER residual value of $20,000. You should also assume that the asset is returned to Super LeaseCo on 12/31/16 and that its actual fair value at that date is only $15,000. As a result, XYZ must pay an additional $5,000 at the end of the lease. Assumption 3. Assume that XYZ has NOT guaranteed any residual value. You should assume that the asset is returned to Super LeaseCo on 12/31/16 and that its actual fair value at that date is $15,000
