21A-3 a-g

Larkspur Company leases an automobile with a fair value of $15,742 from John Simon Motors, Inc., on the following terms:

1.		Non-cancelable term of 50 months.
2.		Rental of $330 per month (at the beginning of each month). (The present value at 0.5% per month is $14,640.)
3.		Larkspur guarantees a residual value of $1,020 (the present value at 0.5% per month is $795). Larkspur expects the probable residual value to be $1,020 at the end of the lease term.
4.		Estimated economic life of the automobile is 60 months.
5.		Larkspurs incremental borrowing rate is 6% a year (0.5% a month). Simons implicit rate is unknown.

A. 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? $_________

B. Based on the original fact pattern, record the lease on Larkspurs books at the date of commencement.

C. Record the second months lease payment.

D. Record the first months amortization on Larkspurs books (assume straight-line).

E. Suppose that instead of $1,020, Larkspur expects the residual value to be only $500 (the guaranteed amount is still $1,020).

PV Of Lease Payments.. $_____