Question
Larkspur Company leases an automobile with a fair value of $10,844 from John Simon Motors, Inc., on the following terms: 1. Non-cancelable term of 50
Larkspur Company leases an automobile with a fair value of $10,844 from John Simon Motors, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $220 per month (at the beginning of each month). 3. Larkspur guarantees a residual value of $1,120. Delaney expects the probable residual value to be $1,120 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.
*Record the first months lease payment (at commencement of the lease).
*Record the second months lease payment.
*Based on the original fact pattern, record the lease on Larkspurs books at the date of commencement.
*Record the first months amortization on Larkspurs books (assume straight-line). *Suppose that instead of $1,120, Larkspur expects the residual value to be only $500 (the guaranteed amount is still $1,120). How does the calculation of the present value of the lease payments change from part (b)?
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