Reference no: EM132718997
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). (The present value at 0.5% per month is $8,873.)
3. Splish Brothers guarantees a residual value of $1,580 (the present value at 0.5% per month is $920). 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.
Required -
(a) What is the nature of this lease to Splish Brothers?
(b) What is the present value of the lease payments to determine the lease liability?
(c) Based on the original fact pattern, record the lease on Splish Brothers's books at the date of commencement.
(d) Record the first month's lease payment (at commencement of the lease).
(e) Record the second month's lease payment.
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