Exercise 21-03 Splish Brothers Company leases an automobile with a fair value of $13,924 from John Simon Motors, Inc., on the following terms: 1. 2. 3. 4. 5. Non-cancelable term of 50 months. Rental of $280 per month (at the beginning of each month). Splish Brothers guarantees a residual value of $1,580. Delaney expects the probable residual value to be $1,580 at the end of the lease term. Estimated economic life of the automobile is 60 months. Splish Brothers's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What is the nature of this lease to Splish Brothers? The nature of this lease is a/an finance lease. SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT 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 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Based on the original fact pattern, record the lease on Splish Brothers's 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 Right-of-Use Asset Lease Liability SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Record the first month's 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 Lease Liability Cash SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Record the second month's 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 Lease Liability Interest Expense Cash SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Record the first month's amortization on Splish Brothers's 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 Amortization Expense Right-of-Use Asset SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Suppose that instead of $1,580, Splish Brothers expects the residual value to be only $500 (the guaranteed amount is still $1,580). 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 $ Click if you would like to Show Work for this question: Open Show Work SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT
