Reference no: EM132731102
Problem 1: Cardinal Ltd. is negotiating to lease a piece of equipment to MTBA plc. MTBA requests that the lease be for 9 years. The equipment has a useful life of 10 years. Cardinal wants a guarantee that the residual value of the equipment at the end of the lease is at least £5,000. MTBA agrees to guarantee a residual value of this amount though it expects the residual value of the equipment to be only £2,500 at the end of the lease term. If the fair value of the equipment at lease commencement is £70,000, what would be the amount of the annual rental payments Cardinal demands of MTBA, assuming each payment will be made at the beginning of each year and Cardinal wishes to earn a rate of return on the lease of 8%? (Present value of 1 for 4 periods at 6% and Present value of an ordinary annuity for 4 periods at 6%.)
a) £47,000
b) £23,763
c) £23,237
d) £6,706
Problem 2: Cardinal Ltd. is negotiating to lease a piece of equipment to MTBA plc. MTBA requests that the lease be for 9 years. The equipment has a useful life of 10 years. Cardinal wants a guarantee that the residual value of the equipment at the end of the lease is at least £5,000. MTBA agrees to guarantee a residual value of this amount though it expects the residual value of the equipment to be only £2,500 at the end of the lease term. If the fair value of the equipment at lease commencement is £70,000. What is a journal entry on this situation?
a) Debit Lease Receivable 150,001, and Credit Sales Revenue 150,001
b) Debit Lease Receivable 150,001and Cost of goods sold 120,000, and Credit Sales Revenue 150,001 and Inventory 120,000
c) Debit Lease Receivable 30,044, and Credit Cash 30,044
d) Debit Cash 30,040, andCredit Lease Receivable 30,040
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