Reference no: EM13498229
Question II Barney's Business Consulting
Jason Barney was the CEO of Barney's Business Consulting (BBC), a well-known consultancy. Jason, known by everyone as J, frequently travelled between his office and the airport. J determined that it would be a good business investment if BBC acquired a Porsche 911 so that he could drive more quickly between the office and the airport. On January 1, 2011, BBC entered into a 36 month lease agreement to acquire the car. The terms provided that BBC would pay $1,500 per month at the end of each month. BBC also has the option to purchase the Porsche at the end of the lease term (i.e. December 31, 2013) for $42,700. BBC estimated that if BBC purchased the 911 instead of leasing it, it would pay approximately $75,000 in cash. BBC estimated that, because of J's driving habits, the Porsche would be worn out after 5 years of use. Based on BBC's credit history, it believed that it could arrange for a loan with similar characteristics at an interest rate of 1 percent per month.
Assume that BBC determined that the purchase option is a bargain purchase option. BBC therefore accounts for the lease as a capital lease.
1. Calculate the present value on January 1, 2011 of the monthly lease payments.
2. Calculate the present value on January 1, 2011 of the $42,700 purchase option.
3. Is the purchase option a bargain purchase option? YES or NO (choose one) Explain:
4. Present the journal entry that BBC would enter on January 1, 2011.
5. Calculate interest expense arising from the lease for the month of January 2011.
6. Calculate the book value of the lease obligation as of January 31, 2011.
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