Question

Culver Company leases an automobile with a fair value of $19,159 from John Simon Motors, Inc., on the following terms: 1. Noncancelable term of 50 months. 2. Rental of $450 per month (at end of each month). (The present value at 1% per month is $17,639.) 3. Estimated residual value after 50 months is $1,240. (The present value at 1% per month is $754.) Culver Company guarantees the residual value of $1,240. 4. Estimated economic life of the automobile is 60 months. 5. Culver Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown.

How do I calculate and record first months lease payment

Answer 1

Since the lease term of 50 months cobers the substantial part of the economic life of the assetaof 60 monthsm this is a finance lease.

Present value of minimum lease payment

= Present value of lease rental + Present value of residual value

= $17,639 + $754 = $18,393

Journal Entries

Automobile Dr.................. 18,393

Lease liability Cr….............................18,393

(Being asset booked as finance lease)

Interest expense Dr...........183.90 ($18,393*1%)

Lease liability Dr................266.10

Cash Cr.............................................450.00

(Being first lease payment booked)