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.) What is the nature of this lease to Splish Brothers? The nature of this lease is a/an select a nature of the lease financeoperating lease. 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 Based on the original fact pattern, record the lease on Splish Brothers’ books at the date of commencement Record the first month’s lease payment (at the commencement of the lease) Record the first month’s amortization on Splish Brothers’ books (assume straight-line)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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.)

What is the nature of this lease to Splish Brothers?

The nature of this lease is a/an select a nature of the lease financeoperating lease.

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

Based on the original fact pattern, record the lease on Splish Brothers’ books at the date of commencement

Record the first month’s lease payment (at the commencement of the lease)

Record the first month’s amortization on Splish Brothers’ books (assume straight-line).

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