BMC Inc has a policy of buying their equipment through leasing. On January 1, 2011,...
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BMC Inc has a policy of buying their equipment through leasing. On January 1, 2011, BMC signed a lease contract with Brain Media Inc for a new Bus that had a selling price of Rs. 315,000. The lease specifies that annual payments of Rs. 61,800 will be made for six years. The first lease payment is made on January 1. 2011, and subsequent payments are made on December 31 of each year. BMC guarantees a residual value of Rs. 33.535 at the end of the 6-year period. BMC has an incremental borrowing rate of 11% and the implicit interest rate to Brain Media is 10% after considering the GRV. The economic life of the Bus is eight years. BMC uses the calendar year for reporting purposes and straight-line depreciation to depreciate other equipment. Required: i. Compute the amount to be capitalized as an asset on the lessee's books for the Bus. BMC knows that Brain Medias implicit rate is 10%. ii. Prepare a schedule showing the reduction of the liability by the annual payments after considering the interest charges. iii. Give the journal entries that would be made on BMCs books for the first two years of the lease.
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