| | Module 4 Problem-Solution Assignment: |
| | Problem 1 |
| | Conceptual Leasing bought a grader for $600,000 and the leased it back to Parole Inc. on January 1, 2011.
The description of the lease follows:
• Quarterly Rent Payments=$34,000
• Leaser term= 4 years (16 quarters)
• No residual value of BPO present
• Economic life of the grader is 5 years
• Lessee’s borrowing rate is 10%
• Fair Value of the grader is $600,000
The collection of rental payment is reasonably assured and there are no lessor costs to be incurred. |
| | Requirements: |
| | 1 | Prepare the entries for both Conceptual and Parole Inc. from the start of the lease through the rental payment on April 1, 2011. |
| | Problem 2 |
| | Below is a list of key terms associated with leasing which are then followed by a series of definitions: |
| | 1. Ownership type costs such as insurance, repairs and taxes
2. Portion of the residual value of the leased property that is guaranteed by the lessee
3. Commitments by the lessor to guarantee performance of the leased property in a manner which would be more extensive than a warranty
4. The difference between the fair value of the property at the beginning of the lease and it cost or carrying value
5. Provision that allows the lessee to purchase the leased property at a price so favorable it is a reasonable certainty that the sale will occur
6. Rate that equates the fair value of the leased property and the present value of the lease payment plus the unguaranteed residual value
7. Rate that would have been incurred if the property had been purchased by debt
8. Required to be paid by the lessee to the lessor over the life of the lease
9. Portion of estimated residual value not guaranteed by the lessee
10. Incurred by the lessor to originate a lease that results directly from and is essential to acquiring the lease |
| | Requirements: |
| | 2 | Take the key terms in the table above and match them with the most appropriate definition presented from the list. |
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