Brecker Company leases an automobile with a fair value of $10,906 from Emporia Motors, Inc., on the following terms:

  1. Non-cancelable term of 50 months.
  2. Rental of $250 per month (at end of each month). (The present value at 1% per month is $9,800.)
  3. Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.) Brecker Company guarantees the residual value of $1,180.
  4. Estimated economic life of the automobile is 60 months.
  5. Brecker Company’s incremental borrowing rate is 12% a year (1% a month). It is impracticable to determine Emporia’s implicit rate.

Instructions
  (a) What is the nature of this lease to Brecker Company?
  (b) What is the present value of the minimum lease payments?
  (c) Record the lease on Brecker Company’s books at the date of inception.

  (d) Record the first month’s depreciation on Brecker Company’s books (assume straight-line).
  (e) Record the first month’s lease payment.