Reference no: EM132559049
Question 1 - Financing Type Lease - Lessee
On January 1st, 2019 Brook Paving Co leased a road-paving machine from Caterpillar Co. for 7 years, with annual payments of $506,986 due at the signing of the lease, and then at December 31st for the next 6 years. The equipment had normal sales price of $3,000,000. The interest rate implicit in the lease is 6%. At the end of the lease, title to the equipment transfers to Asphalt Paving Co. The estimate useful life of the equipment was 10 years, after which its salvage value was expected to be $50,000.
Required -
a. Calculate the present value of future lease payments.
b. Under which of the 5 tests does this arrangement qualify as a financing type lease (note that their could be more than one)?
c. Prepare the first three lines of the amortization table that would be used by both the lessee and the lessor?
d. Record the journal entries Brook would make for this lease on January 1, 2019?
e. How much depreciation expense Brook would record in 2019?
Question 2 - Sales-Type lease with Selling Profit - Lessor
On January 1st, 2019 Brook Paving Co leased a road-paving machine from Caterpillar Co. for 7 years, with annual payments of $506,986 due at the signing of the lease, and then at December 31st for the next 6 years. The equipment had normal sales price of $3,000,000. The interest rate implicit in the lease is 6%. At the end of the lease, title to the equipment transfers to Asphalt Paving Co. The estimate useful life of the equipment was 10 years, after which its salvage value was expected to be $50,000. Caterpillar's cost of the equipment was $2.5 million.
a. Prepare Caterpillar's JEs on January 1, 2019 for this Sales-Type Lease with Selling Profit.
b. Prepare Caterpillar's JE on December 31, 2019 for the receipt of the second payment under this lease.
c. Compute the total impact of these leasing transactions on Caterpillar's net income for 2019 (ignore income taxes).