Delaney Company leases an automobile with a fair value of $10,000 from John 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. Delaney guarantees a residual value of $1,180 (the present value at 0.5% per month is $920). Delaney expects the probable residual value to be $1,180 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Delaney’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown. What is the present value of the lease payments to determine the lease liability?
Delaney Company leases an automobile with a fair value of $10,000 from John 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. Delaney guarantees a residual value of $1,180 (the present value at 0.5% per month is $920). Delaney expects the probable residual value to be $1,180 at the end of the lease term. 4. Estimated economic life of the automobile is 60 months. 5. Delaney’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown. What is the present value of the lease payments to determine the lease liability?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Delaney Company leases an automobile with a fair value of $10,000 from John 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. | Delaney guarantees a residual value of $1,180 (the present value at 0.5% per month is $920). Delaney expects the probable residual value to be $1,180 at the end of the lease term. | |
| 4. | Estimated economic life of the automobile is 60 months. | |
| 5. | Delaney’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown. |
What is the present value of the lease payments to determine the lease liability?
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