Sage Hill Company leases an automobile with a fair value of
$12,257 from John Simon Motors, Inc., on the following
terms:
1. 

Noncancelable term of 50 months. 
2. 

Rental of $250 per month (at the beginning of each month). (The
present value at 0.5% per month is $11,091.) 
3. 

Sage Hill guarantees a residual value of $1,190 (the present
value at 0.5% per month is $927). Delaney expects the probable
residual value to be $1,190 at the end of the lease term. 
4. 

Estimated economic life of the automobile is 60 months. 
. 

5. Sage Hill’s incremental borrowing rate is 6% a year (0.5% a
month). Simon’s implicit rate is unknown.

What is the nature of this lease to Sage Hill? (financing or
operating)
What is the present value of the lease payments to determine the
lease liability?
Based on the original fact pattern, record the lease on Sage
Hill’s books at the date of commencement.
Record the first month’s lease payment (at commencement of the
lease).
Record the second month’s lease payment.
Record the first month’s amortization on Sage Hill’s books
(assume straightline).
Suppose that instead of $1,190, Sage Hill expects the residual
value to be only $500 (the guaranteed amount is still $1,190). How
does the calculation of the present value of the lease payments
change from part (b)?



