2.Teal Mountain Company leases an automobile with a fair value of $20,014 from John Simon Motors, Inc., on the following terms:

1.		Non-cancelable term of 50 months.
2.		Rental of $410 per month (at the beginning of each month). (The present value at 0.5% per month is $18,190.)
3.		Teal Mountain guarantees a residual value of $1,840 (the present value at 0.5% per month is $1,434). Teal Mountain expects the probable residual value to be $1,840 at the end of the lease term.
4.		Estimated economic life of the automobile is 60 months.
5.		Teal Mountain'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.)

(a)

What is the nature of this lease to Teal Mountain?

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

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(b)

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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(c)

Based on the original fact pattern, record the lease on Teal Mountain'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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(d)

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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(e)

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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(f)

Record the first month's amortization on Teal Mountain'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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(g)

Suppose that instead of $1,840, Teal Mountain expects the residual value to be only $500 (the guaranteed amount is still $1,840). 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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• Accounts Payable
• Accumulated Depreciation-Buildings
• Accumulated Depreciation-Leased Buildings
• Accumulated Depreciation-Capital Leases
• Accumulated Depreciation-Equipment
• Accumulated Depreciation-Leased Equipment
• Accumulated Depreciation-Leased Machinery
• Accumulated Depreciation-Machinery
• Accumulated Depreciation-Right-of-Use Asset
• Advertising Expense
• Amortization Expense
• Airplanes
• Buildings
• Cash
• Cost of Goods Sold
• Deferred Gross Profit
• Deposit Liability
• Depreciation Expense
• Equipment
• Executory Costs
• Executory Costs Payable
• Gain on Disposal of Equipment
• Gain on Disposal of Plant Assets
• Gain on Lease
• Gain on Sale of Buildings
• Insurance Expense
• Interest Expense
• Interest Payable
• Interest Receivable
• Interest Revenue
• Inventory
• Land
• Leased Asset
• Leased Buildings
• Leased Equipment
• Lease Expense
• Leased Land
• Lease Liability
• Lease Receivable
• Lease Revenue
• Legal Expense
• Loss on Capital Lease
• Machinery
• Maintenance and Repairs Expense
• Notes Payable
• Prepaid Lease Executory Costs
• Prepaid Legal Fees
• Property Tax Expense
• Property Tax Payable
• Rent Expense
• Rent Payable
• Rent Receivable
• Rent Revenue
• Revenue from Sale-Leaseback
• Right-of-Use Asset
• Salaries and Wages Expense
• Sales Revenue
• Selling Expenses
• Trucks
• Unearned Profit on Sale-Leaseback
• Unearned Lease Revenue
• Unearned Service Revenue