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Solution to Aquarius Problem

Solution to Aquarius Problem . Leasing .

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Solution to Aquarius Problem

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  1. Solution to Aquarius Problem Leasing

  2. Length of Lease (2011-2030) – 19 YearsPV factor for 19 yrs 10% – 8.36492PV of lease period = 9.36492$225,000 * 9.36492 = $2,107,107Residual Value - $78,000PV of residual value = $78,000/(1.1^20) = $11,594PV of payments + PV of residual value = 2,118,701 (Net Investment)

  3. Payments = 20 * 225,000 = 4,500,000+ Residual Value = 78,000Gross Investment = 4,578,000

  4. Gross Investment 4,578,000- Net Investment 2,118,701Unearned Interest 2,459,299 Original cost of ferry 1,500,000PV of residual Value - 11,594Cost of sales 1,488,406

  5. a) Financial Profit on Sale - 2,459,299 Manufacturer’s Profit - 2,118,701 1,500,000 618,701

  6. b) Journal Entry Debits Credit Lease Payment Rec. 4,578,000 Cost of Sales 1,488,406 Sales 2,107,107 Unearned Interest 2,459,299 Cost of Ferry 1,500,000

  7. c) The implicit rate of interest is actually 10%, but if calculated using the IRR method, it is 9.9075%

  8. d) Dec 31, 2011 Debits Credit Unearned Interest 140,706 Interest Earned 140,706 Apr 1, 2012 Unearned Interest 46,902 Interest Earned 46,902 Cash 225,000 Lease Payments receivable 225,000

  9. e) Balance of Lease payments receivable on Dec 31, 2013 – Original Balance 4,578,000 Less 3 * 225,000 - 675,000 3,903,000

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