Question

Shamrock Company leases an automobile with a fair value of $13,171 from John Simon Motors, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $260 per month (at the beginning of each month). (The present value at 0.5% per month is $11,535.) 3. Shamrock guarantees a residual value of $1,770 (the present value at 0.5% per month is $1,379). Delaney expects the probable residual value to be $1,770 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Shamrock’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

What is the nature of this lease to Shamrock? The nature of this lease

What is the present value of the lease payments to determine the lease liability? (Round answer to 0 decimal places, e.g. 5,275.)

Present value of the lease payments

Based on the original fact pattern, record the lease on Shamrock’s books at the date of commencement. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Record the first month’s lease payment (at commencement of the lease). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

Record the second 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. 5,275.)

Record the first month’s amortization on Shamrock’s books (assume straight-line). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.25.)

Suppose that instead of $1,770, Shamrock expects the residual value to be only $500 (the guaranteed amount is still $1,770). How does the calculation of the present value of the lease payments change from part

(b)? (Round answer to 0 decimal places, e.g. 5,275.) PV of lease payments

Answer 1