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.

a. Record the second month's lease payment

Account titles debit credit

Interest expense ?

Lease liability ?

Cash - 440

b. Record the first months amortization on Larkspurs books (assume straight-line).

Account titles debit credit

Amortization expense ? -

Right of use asset - ?

c. 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)?

PV of lease payments ?

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