Question

Windsor Company leases an automobile with a fair value of $14,845 from John Simon Motors, Inc., on the following terms:

1.		Non-cancelable term of 50 months.
2.		Rental of $310 per month (at the beginning of each month). (The present value at 0.5% per month is $13,753.)
3.		Windsor guarantees a residual value of $1,030 (the present value at 0.5% per month is $803). Windsor expects the probable residual value to be $1,030 at the end of the lease term.
4.		Estimated economic life of the automobile is 60 months.
5.		Windsor’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown. QUESTIONS 1.What is the present value of the lease payments to determine the lease liability? 2.Based on the original fact pattern, record the lease on Windsor’s books at the date of commencement. 3.Record the second month’s lease payment. 4.Record the first month’s amortization on Windsor’s books (assume straight-line). 5.Suppose that instead of $1,030, Windsor expects the residual value to be only $500 (the guaranteed amount is still $1,030). How does the calculation of the present value of the lease payments change from part (b)? PV of lease payments?

Answer 1