Question

Sage Hill Company leases an automobile with a fair value of $17,274 from John Simon Motors, Inc., on the following terms:

1.		Non-cancelable term of 50 months.
2.		Rental of $360 per month (at the beginning of each month).
3.		Sage Hill guarantees a residual value of $1,240. Delaney expects the probable residual value to be $1,240 at the end of the lease term.
4.		Estimated economic life of the automobile is 60 months.
5.		Sage Hill’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? (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 Sage Hill’s books at the date of commencement. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

Record the first month’s lease payment (at commencement of the lease). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

Record the second month’s lease payment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

Record the first month’s amortization on Sage Hill’s books (assume straight-line). (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.25.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

Answer 1

(a)	The present value of the minimum lease payments		16937
	($360 x 44.36350) i.e PVAD 0.5%, 50 + ($1,240 x 0.779286)
(b)	Accounts Titles and Explanation	Debit	Credit
	Leased Equipment	$16,937
	Lease Liability		$16,937
	(To record lease)
	Lease Liability	$360
	Cash		$360
	(To record first lease payment)
	Lease Liability	$277
	Interest Expense	$83		($16.937 - $360) x 0.5%
	Cash		$360
	(To record second lease payment)
	Depreciation Expense	$262		[($16,937 - $1,240)/60 months]
	Accumulated Depreciation		$262
	(To record amortization)