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Anderson Company leases an equipment with a fair value of $18,000 from Wright Motors, Inc., on the following terms. Non-cancelable term of 50 months. Rental
Anderson Company leases an equipment with a fair value of $18,000 from Wright Motors, Inc., on the following terms.
- Non-cancelable term of 50 months.
- Rental of $400 per month (at the beginning of each month). (The present value factor at 0.5% to calculate the present value of monthly payments is 44.36350.)
- Anderson guarantees a residual value of $2,000 (the present value factor at 0.5% per month is 0.77929). Anderson expects the probable residual value to be $500 at the end of the lease term.
- Estimated economic life of the automobile is 60 months.
- Andersons incremental borrowing rate is 6% a year (0.5% a month). Wrights implicit rate is unknown.
Instructions
- What is the nature of this lease to Anderson?
- What is the present value of the lease payments to determine the lease liability?
- Based on the original fact pattern, record the lease on Andersons books at the date of commencement.
- Record the first months lease payment (at commencement of the lease).
- Record the second months lease payment.
- Record the first month's amortization on Delaney's books (assume straight-line).
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