Exercise 21-03

Metlock Company leases an automobile with a fair value of $11,845 from John Simon Motors, Inc., on the following terms:

1.		Non-cancelable term of 50 months.
2.		Rental of $240 per month (at the beginning of each month).
3.		Metlock guarantees a residual value of $1,240. Delaney expects the probable residual value to be $1,240 at the end of the lease term.
4.		Estimated economic life of the automobile is 60 months.
5.		Metlocks incremental borrowing rate is 6% a year (0.5% a month). Simons implicit rate is unknown.

(a) 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.)

(b) Record the first months amortization on Metlocks 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.)

(c) Suppose that instead of $1,240, Metlock expects the residual value to be only $500 (the guaranteed amount is still $1,240). 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.)