Question

Splish Brothers Company leases an automobile with a fair value of $13,924 from John Simon Motors, Inc., on the following terms:

1.		Non-cancelable term of 50 months.
2.		Rental of $280 per month (at the beginning of each month).
3.		Splish Brothers guarantees a residual value of $1,580. Delaney expects the probable residual value to be $1,580 at the end of the lease term.
4.		Estimated economic life of the automobile is 60 months.
5.		Splish Brothers’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.

Click here to view factor tables.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

What is the nature of this lease to Splish Brothers?

The nature of this lease is a/an select a nature of the lease                                                                      financeoperating lease.

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List of Accounts

  

  

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

$enter the Present value of the lease payments in dollars rounded to 0 decimal places

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List of Accounts

  

  

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

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

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List of Accounts

  

  

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.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

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List of Accounts

  

  

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.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

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List of Accounts

  

  

Record the first month’s amortization on Splish Brothers’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.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

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List of Accounts

  

  

Suppose that instead of $1,580, Splish Brothers expects the residual value to be only $500 (the guaranteed amount is still $1,580). 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

$enter the present value of lease payments in dollars rounded to 0 decimal places

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List of Accounts

Answer 1