E21-2 Pat Delaney Company leases an automobile with a fair value of $8,725 from John Simon Motors, Inc., on the following terms.
1. Noncancelable term of 50 months.
2. Rental of $200 per month (at end of each month). (The present value at 1% per month is $7,840.)
3. Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.) Delaney Company guarantees the residual value of $1,180.
4. Estimated economic life of the automobile is 60 months.
5. Delaney Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown.
What is the present value of the minimum lease payments?
The present value of the minimum lease payments $
(a) Record the lease on Delaney Company’s books at the date of inception. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
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Account Titles and Explanation
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Debit
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Credit
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(b) Record the first month’s depreciation on Delaney Company’s books (assume straight-line). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 15.)
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Account Titles and Explanation
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Debit
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Credit
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(c) Record the first month’s lease payment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 15.)
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Account Titles and Explanation
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Debit
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Credit
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