Anderson Company leases an equipment with a fair value of $18,000 from Wright Motors, Inc., on the following terms.

1. Non-cancelable term of 50 months.
2. 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.)
3. 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.
4. Estimated economic life of the automobile is 60 months.
5. Andersons incremental borrowing rate is 6% a year (0.5% a month). Wrights implicit rate is unknown.

Instructions

1. What is the nature of this lease to Anderson?
2. What is the present value of the lease payments to determine the lease liability?
3. Based on the original fact pattern, record the lease on Andersons books at the date of commencement.
4. Record the first months lease payment (at commencement of the lease).
5. Record the second months lease payment.
6. Record the first month's amortization on Delaney's books (assume straight-line).