Delaney Company leases an automobile with a fair value of $10,000 from Simon Motors, Inc., on the following terms. 1. Non-cancelable term of 50 months. 2. Rental of $200 per month at the beginning of each month. (The present value at 0.5% per month is $8,873.) 3. Estimated economic life of the automobile is 60 months. 4. Delaney's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown. Instructions a.    What is the present value of the lease payments to determine the lease liability? b.    Record the lease on Delaney's books at the commencement date. c.    Record the first month's lease payment (at commencement of the lease). d.    Record the second month's lease payment. e.    Record the first month's depreciation on Delaney's books (assume straight-line).

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Delaney Company leases an automobile with a fair value of $10,000 from Simon Motors, Inc., on the following terms.

  • 1. Non-cancelable term of 50 months.
  • 2. Rental of $200 per month at the beginning of each month. (The present value at 0.5% per month is $8,873.)
  • 3. Estimated economic life of the automobile is 60 months.
  • 4. Delaney's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown.

Instructions

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

b.    Record the lease on Delaney's books at the commencement date.

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

d.    Record the second month's lease payment.

e.    Record the first month's depreciation on Delaney's books (assume straight-line).

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