Exercise 21-03 (Part Level Submission)

Shamrock Company leases an automobile with a fair value of $13,171 from John Simon Motors, Inc., on the following terms:

1. Non-cancelable term of 50 months

2. Rental of $260 per month (at the beginning of each month)

3. Shamrock guarantees a residual value of $1,770. Delaney expects the probable residual value to be $1,770 at the end of the lease term

4. Estimated economic life of the automobile is 60 months.

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

A. What is the nature of this lease to Shamrock?

- the nature of this lease is a finance lease.

B. What is the present value of the lease payments to determine the lease liability?

C. Based on the original fact pattern, record the lease on Shamrock's books at the date of commencement

D. Record the first months lease payment (at commencement of the lease)

E. Record the second months lease payment

F. Record the first months amortization on Shamrock's books (assume straight-line)