Question
Sansim Corporation enters into an agreement with Truck 4 all to leave a van on Dec 31 2019 the following info relates to the agreement:
Sansim Corporation enters into an agreement with Truck 4 all to leave a van on Dec 31 2019 the following info relates to the agreement:
1. the term of the non-cancelable lease is 4 years with no renewal or bargain purchase option. The remaining economic life of the car is 4 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 45,000 at commencement of the lease
3. Annual payments are required to be made december 31 at the end of each year of the lease, beginning dec 31, 2020. the first payment is to be made of an amount of 12,267.84 with each payment increasing by a constant rate of 4% from the previous payment (the second payment will be 12758.55 and so on)
4. sansim's incremental borrowing rate is 6%. The rate implicit in the lease is unknown.
5. Sansim uses straight-line depreciation for all similar vehicles
Instructions:
a) Prepare Sansim's journal entries for 2019, 2020, 2021, 2022
b) Assume, instead of a constant rate of increase, the annual lease payments will increase according to the consumer Price Index (CPI. At its current level, the CPI stipulates that the first rental payment should be 12,200. What would be the impact on the journal entries made by Samsim at commencement of the lease, as well as for subsequent years?
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