Exercise 21A-3 a-g

Larkspur Company leases an automobile with a fair value of $20,964 from John Simon Motors, Inc., on the following terms:

1. Non-cancelable term of 50 months. 2. Rental of $440 per month (at the beginning of each month). (The present value at 0.5% per month is $19,520.) 3. Larkspur guarantees a residual value of $1,330 (the present value at 0.5% per month is $1,036). Larkspur expects the probable residual value to be $1,330 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Larkspurs incremental borrowing rate is 6% a year (0.5% a month). Simons implicit rate is unknown.

Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Based on the original fact pattern, record the lease on Larkspurs books at the date of commencement. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

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.)

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.)

Record the first months amortization on Larkspurs 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.)

Suppose that instead of $1,330, Larkspur expects the residual value to be only $500 (the guaranteed amount is still $1,330). 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 $