Brecker Company leases an automobile with a fair value of $10,906 from Emporia Motors, Inc., on the following terms.
1. Noncancelable term of 50 months.
2. Rental of $250 per month (at end of each month). (The present value at 1% per month is $9,800.)
3. Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.) Brecker Company guarantees the residual value of $1,180.
4. Estimated economic life of the automobile is 60 months.
5. Brecker Company's incremental borrowing rate is 12% a year (1% a month). Emporia's implicit rate is unknown.
a) Record the first month's depreciation on Brecker Company's books (assume straight-line).
b) Record the first month's lease payment.