Problem: Teal Mountain Company leases an automobile with a fair value of $20,014 from John Simon Motors, Inc., on the following terms:
1. Non-cancelable term of 50 months.
2. Rental of $410 per month (at the beginning of each month).
3. Teal Mountain guarantees a residual value of $1,840. Delaney expects the probable residual value to be $1,840 at the end of the lease term.
4. Estimated economic life of the automobile is 60 months.
5. Teal Mountain's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown.
Required:
Q1. What is the nature of this lease to Teal Mountain?
Q2. What is the present value of the lease payments to determine the lease liability?
Q3. Based on the original fact pattern, record the lease on teal Mountain's books at the date of commencement.
Q4. Record the first month's lease payment.
Q5. Record the second month's lease payment.
Q6. Record the first month's amortization on teal Mountain's books (assume straight-line).
Q7. Suppose that instead of $1,840, teal Mountain expects the residual value to be only $500 (the guaranteed amount is still $1,840). How does the calculation of the present value of the lease payments change from part (2)?
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