Pat Delaney Company leases an automobile with a fair value of $13,091 from John
ID: 2461542 • Letter: P
Question
Pat Delaney Company leases an automobile with a fair value of $13,091 from John Simon Motors, Inc., on the following terms. 1. Noncancelable term of 51 months. 2. Rental of $310 per month (at end of each month). (The present value at 1% per month is $12,337.) 3. Estimated residual value after 51 months is $1,040. (The present value at 1% per month is $626.) Delaney Company guarantees the residual value of $1,040. 4. Estimated economic life of the automobile is 53 months. 5. Delaney Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown. What is the present value of the minimum lease payments?
Explanation / Answer
Present value of minimum lease payment = 12337 + 626 = $ 12963