Splish Brothers Company leases an automobile with a fair value of $13,924 from John Simon Motors, Inc., on the following terms:

1. Non-cancelable term of 50 months.

2. Rental of $280 per month (at the beginning of each month). (The present value at 0.5% per month is $8,873.)

3. Splish Brothers guarantees a residual value of $1,580 (the present value at 0.5% per month is $920). Delaney expects the probable residual value to be $1,580 at the end of the lease term.

4. Estimated economic life of the automobile is 60 months.

5. 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.)

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(a)

What is the nature of this lease to Splish Brothers?

The nature of this lease is a/an select a nature of the leaseEntry field with correct answer

finance

lease.

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(b)

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

$enter the Present value of the lease payments in dollars rounded to 0 decimal places

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(c)

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

Leased Buildings 12,422

Lease Liability 12,422

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(d)

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 280

Cash 280

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(e)

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