Delaney Company leases an automobile with a fair value of $10,000 from John Simon Motors, Inc., on the following terms:

1.

Non-cancelable term of 50 months.

2.

Rental of $200 per month (at the beginning of each month). (The present value at 0.5% per month is $8,873.)

3.

Delaney guarantees a residual value of $1,180 (the present value at 0.5% per month is $920). Delaney expects the probable residual value to be $1,180 at the end of the lease term.

4.

Estimated economic life of the automobile is 60 months.

5.

Delaneys incremental borrowing rate is 6% a year (0.5% a month). Simons implicit rate is unknown.

What is the nature of this lease to Delaney?

The nature of this lease is a/an....................

lease.

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..............

Based on the original fact pattern, record the lease on Delaneys 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

Record the first months 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

Record the second months 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

Record the first months amortization on Delaneys 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
Suppose that instead of $1,180, Delaney expects the residual value to be only $500 (the guaranteed amount is still $1,180). 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.........................