Question

Skysong Company leases an automobile with a fair value of $18,680 from John Simon Motors, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $380 per month (at the beginning of each month). 3. Skysong guarantees a residual value of $1,870. Delaney expects the probable residual value to be $1,870 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Skysong’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.

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 Skysong’s books (assume straight-line).

Suppose that instead of $1,870, Skysong expects the residual value to be only $500 (the guaranteed amount is still $1,870). What is the present value of lease payments?

Answer 1