Metlock Company leases an automobile with a fair value of $16,767 from John Simon Motors, Inc., on the following terms:

1.Non-cancelable term of 50 months.

2.Rental of $350 per month (at the beginning of each month).

3.Metlock guarantees a residual value of $1,170. Delaney expects the probable residual value to be $1,170 at the end of the lease term.

4.Estimated economic life of the automobile is 60 months.5.Metlock's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown.

What is the nature of this lease to Metlock?

Finance or Operating?

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

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

Account Titles and Explanation Debit Credit

(a)

(b)

Record the first month's lease payment (at commencement of the lease).

Account Titles and ExplanationDebitCredit

(a)

(b)

Record the second month's lease payment.

Account Titles and ExplanationDebitCredit

(a)

(b)

(c)

Record the first month's amortization on Metlock's books (assume straight-line).

Account Titles and ExplanationDebitCredit

(a)

(b)

Suppose that instead of $1,170, Metlock expects the residual value to be only $500 (the guaranteed amount is still $1,170). How does the calculation of the present value of the lease payments change from part (b)?

PV of lease payments: