Question

Can I have help with this one?

Interstate automobiles corporation leased 40 vans to VIP Transport under a four-year noncancelable lease on January 1, 2021.

A) Equal annual lease payments of $300,000 are due on January 1, 2021, and there after on December 31 each year. The first payment was made on January 1, 2021. Interstate's implicit interest rate is 10% and known by VIP.

B) Vip has the option to purchase all of the vans at the end of the lease for a total of $290,000. The Van's estimated residual value is $300,000 at the end of the lease term and $50,000 at the end of 7 years, the estimated life of each van.

C) Vip estimates the fair value of the vans to be $1,260,000. Interstate's cost was $1,050,000.

D) Vip's incremental borrowing rate is 9%.

E) VIP will pay the executory costs (maintenance, insurance, and other fees not included in the annual lease payments) of $1,000 per year. The depreciation method is straight line.

Required:

if the vans estimated residual value $300,000 at the end term how should beliefs be classified by VIP? By Interstate?

if the vans estimated residual value $400,000 at the end term how should beliefs be classified by VIP? By Interstate?

Regardless of your response to previous requirements, depose VIP recorded the lease on January 1, 2001, as a finance lease in the amount of $1,100,000 and that a bargain purchase option exists. What would be the appropriate journal entries related to the finance lease for the second lease payments on December 31, 2021?

Answer 1

Refer the below images for the above asked questions, in a detailed way of solution with explanation.

lease it solation : Requirement it meets at The lease at the : The non cancelable lease is a finance least one of the following exiferia; transfers ourdship of the property to the end of the tease term. lessee in option that the lessee is the lease reasonably Contains a certain to purchase exercise you part of the estimated The lease term is equal to major part of the e. economic life of the leased property. is) The present value of lease payments including guaranteed residual yawe, and excluding maintenance cost eagoals cors exceedt Substantially all of the far value of the leased property y the underlying asset is of such a specialized nature that it is expected to have no alternative use lessor to the at the end of the lease term. & criteria 13 and 5 are not met criteria a is met only if the purchase option is viewed as a bargain porchase option. But, because $290000 is not sufficiently less than 300000 that weruse of the opre is reasonably Certain to coor, Cypterion 2 is not met. There is no bargain purchase option. & criterion 4 is met only if the present value of the lease payments (not incloding the maintenance costs) is greater than substantially all of the fair vole of the vans.

Vip (lessee)? lease present value of is not a Bpo: payments, assuming the purchase option Lease payments (4100000 x 3.48685) Fair value of vans $ 1046055 1260000 $1846055 = 83%. $ 1260000 the Vans. fair value of case, it is an 83.1. is not substantially all of the Criterion 4 is not meto in this operating lease to the lessee. * Interstate (lessor): lease payments, assuming the purchase option present value of is not a Bpoo Lease payments Residual value (1300000 * 3.48685) ($360000 40.68301) $ 1046055 $ 204903 $1250958 Total Note):- expected Even it not guaranteed, the residual value is by the lessor. : $ 1290958 -99976 $ 1260000 the fair value of the vans, its 991 is substantially all of So criterion 4 is met And since interstate's cost Selling Price" this two selling prokt $ 105000o Sales-type was less than Lease with a

Requirement : criteria 1,3 and I are not met Criterion 2 is met only only if if the the purchase purchase sargain purchase option • So, because an & 400 Doo that (xerage of occor, Caterion 2 is met. purchase option. option option is is viewed as a $290000 is sufficiently the option is reasonably There is a bargain criterion 4 (not including all of the is met only if the present the maintenance costs) is far value of the vansa value of lease paymenty greater than substantially criterion 4. The than substantially as follows: present value all of the of the lease fair value of payments vans, is greater calcolated & Vip (lessee) : present value of Lease payments Bargain porchase lease payments, assuming (1300000 x 3.42685) price (1 290000 40068301) a Bpo: $ 1046055 $ 198073 Total $ 1244126 fair value of Vans 4 1260000 9910 g S1244100 $ 126oooo 99-1. rs substantially all of the dair value of the vans. in this case, it is a finance tease to the lessee.

Interstate (lesson) : present value of lease payments, assuming a Bpo: Lease payments ($300000 4 3 048685) $ 1046055 sargain purchase price (12q0ooot 0.68301) & 19807] Goral $ 124424 Fair value of vans $ 1260000 99.1 99 is - 11244124 $ 1260000 substantially all of the since inter state's cost price this is a fair value of the vans. $ 1080000 was less than its sales-type least with a setting And, * selling profit. Requirement : Journal entries : NEP would record the following at Dec 31, 2021 credit particolars Debir $20000 $ 220000 Interest Lease expense Alc. payable Ac To cash Ale Dr [CS 1100000 -8300000) 4104] Dr $ 300 000 Ale Dr $ 1000 & Maintenance expense to cash Ale P 10vo & Because Boo is assomed, vep would have the vans for 7 years: Amortization expense ac DV [C$ 100006 -880000] = 7] 150000 To Right of ose asset ala- $ 150ooo

* for 4 years. If a Bpo is not assumed, Wep would have the vans Amortigation expense Alcor $ 200 000 [(4 1100000 - € 300000)*4 years] To Right of use asset Ale $ 200000