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

1.Non-cancelable term of50months.

2.Rental of $200per month (at the beginning of each month).

3.Delaneyguarantees a residual value of $1,180. Delaney expects the probable residual value to be $1,180at the end of the lease term.

4.Estimated economic life of the automobile is60months.

5.Delaney's incremental borrowing rate is6% a year (0.5% a month). Simon's implicit rate is unknown.

• What is the nature of this lease toDelaney?
• What is the present value of the lease payments to determine the lease liability?
• Based on the original fact pattern, record the lease onDelaney's books at the date of commencement.
• Record the first month's lease payment (at commencement of the lease)
• Record the second month's lease payment.
• Record the first month's amortization onDelaney's books (assume straight-line).
• Suppose that instead of $1,180,Delaneyexpects 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)?