New Bay Corporation leases an automobile with a fair value of $21,500 from Simon Motors, Inc. on the following lease terms:
1. It is a non-cancellable term of 55 months.
2. The rental is $425 per month at the end of each month (the present value at 1% per month is $17,910).
3. The estimated residual value after 55 months is $2,500 (the present value at 1% per month is $1,446). New Bay Corporation guarantees the residual value of $2,500.
4. The automobile’s estimated economic life is 72 months.
5. New Bay Corporation’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown.
Instructions
(a) Assuming that New Bay Corporation reports under private enterprise standards, explain why this is a capital lease.
(b) What is the present value of the minimum lease payments for New Bay?
(c) Record the lease on New Bay Corporation’s books at the date of inception.
(d) Record the first month’s depreciation on New Bay Corporation’s books (assume the straight-line depreciation method).
(e) Record the first month’s lease payment.
(f) Would this lease be considered a capital lease if the company reported under IFRS?