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Marin Company leases an automobile with a fair value of $16,513 from John Simon Motors, Inc., on the following


1.Non-cancelable term of 50 months.

2.Rental of $340 per month (at the beginning of each month).

3.Marin guarantees a residual value of $1,420. Delaney expects the probable residual value to be $1,420 at the end of the lease term.

4.Estimated economic life of the automobile is 60 months.5.Marin's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown.


A.What is the present value of the lease payments to determine the lease liability?

B.Suppose that instead of $1,420, Marin expects the residual value to be only $500 (the guaranteed amount is still $1,420). How does the calculation of the present value of the lease payments change from part A?

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