Reference no: EM132620003

Western Vehicles Co. (WVC), and Eastbound Ventures Limited (EVL) both widely held companies and with December 31 year ends entered into a lease agreement for specialized mobile equipment which EVL manufactures and sells throughout North America.

In providing the lease quote to WVC, EVL priced the lease on the following basis:

1. Manufactured cost of the equipment is $120,000.
2. Normal selling price of the specialized equipment by EVL: $140,000
3. Desired return: 8%, which is known to WVC.
4. Lease term: 3 years with quarterly lease payments from the lease signing on November 1, 2019 (February 1, May 1, August 1, November 1); the first payment accompanying the signed lease agreement.
5. Economic life of the equipment: 5 years
6. WVC was able to negotiate an unguaranteed residual value of $10,000 at the end of the lease term.
7. To "seal the deal" EVL offered WVC a very attractive maintenance agreement which it had obtained from a service centre and negotiated for its entire fleet of leased assets. The maintenance agreement attributable to WVC was $3,600 per year and EVL required the entire year be paid in advance on the anniversary lease date at signing the lease. EVL reported the fleet maintenance contract paid to the service centre and any recoveries from its lease clients through its Statement of Comprehensive Income.
8. WVC is a normal credit risk for EVL and there are no contingency provisions in the lease agreement.

Question 1: Determine the quarterly payment for the lease only that EVL quoted to WVC.

Question 2: Make all relevant entries for WVC arising from the lease agreement for the year ended December 31, 2019. Supporting computations of WVC's lease capitalization must be shown.

November 1:

December 31:

Question 3: Make all relevant entries for EVL arising from the lease agreement for the year ended December 31, 2019.

November 1:

December 31:

Question 4: For WVC, provide the properly classified balance sheet presentation disclosure as at December 31, 2019.

Western Vehicles Co.

Balance Sheet (partial)

December 31, 2019

Assets

Liabilities

Question 5: What would have been the initial entry(ies) (provide the entry(ies)) by both parties if the lease agreement provided for a guaranteed residual value? Omit the first lease payment and lease receipt entries by the respective parties.