Question

In 2016, Novak Trucking Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company’s specifications on land owned by the company. On January 1, 2017, Novak Trucking took possession of the lease properties.

Although the terminals have a composite useful life of 40 years, the non-cancelable lease runs for 20 years from January 1, 2017, with a bargain purchase option available upon expiration of the lease.

The 20-year lease is effective for the period January 1, 2017, through December 31, 2036. Rental payments of $968,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of $387,200 are due on January 1 for each of the last 10 years of the lease. The company has an option to purchase all of these leased facilities for $1 on December 31, 2036. The lease was negotiated to assure the lessor a 6% rate of return.

Selected present value factors are as follows.

Periods For an Ordinary Annuity of $1 at 6% For $1 at 6% 1 0.943396 0.943396 2 1.833393 0.889996 8 6.209794 0.627412 9 6.801692 0.591898 10 7.360087 0.558395 19 11.158116 0.330513 20 11.469921 0.311805

Prepare a schedule to compute for Novak Trucking the present value of the terminal facilities and related obligation at January 1, 2017. (Round answers to 0 decimal places, e.g. 125.) NOVAK TRUCKING COMPANY Schedule to Compute the Discounted Present Value of Terminal Facilities and the Related Obligation January 1, 2017 Present value of first 10 payments:    Immediate payment $enter a dollar amount    Present value of an ordinary annuity enter a dollar amount $enter a total of the two previous amounts Present value of last 10 payments:    First payment enter a dollar amount    Present value of an ordinary annuity enter a dollar amount    Present value of last 10 payments enter a total of the two previous amounts    Discount to January 1, 2017 enter a dollar amount Discounted present value of terminal    facilities and related obligation $enter a total of the two previous amounts SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

Assuming that the present value of terminal facilities and related obligation at January 1, 2017, was $9,238,846, prepare journal entries for Novak Trucking to record the following: (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 125.) (1) Cash payment to the lessor on January 1, 2019. (2) Amortization of the cost of the leased properties for 2019, using the straight-line method and assuming a zero salvage value. (3) Accrual of interest expense at December 31, 2019. No. Account Titles and Explanation Debit Credit 1. enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount 2. enter an account title To record annual amortization expense on leased assets enter a debit amount enter a credit amount enter an account title To record annual amortization expense on leased assets enter a debit amount enter a credit amount (To record annual amortization expense on leased assets.) 3. enter an account title To record interest accrual on outstanding debt enter a debit amount enter a credit amount enter an account title To record interest accrual on outstanding debt enter a debit amount enter a credit amount (To record interest accrual on outstanding debt.)

Answer 1

1) Prepare a schedule to compute for Novak Trucking the present value of the terminal facilities and related obligation at January 1, 2017. (Round answers to 0 decimal places, e.g. 125.)
NOVAK TRUCKING COMPANY
Schedule to Compute the Discounted Present Value
of Terminal Facilities and the Related Obligation
1-Jan-17
Present value of first 10 payments:
Immediate payment	$             968,000.00
Present value of an ordinary annuity	$          6,584,037.86	$           7,552,037.86
Present value of last 10 payments:
First payment	$             387,200.00
Present value of an ordinary annuity	$          2,633,615.14
Present value of last 10 payments	$          3,020,815.14
Discount to January 1, 2017		$           1,686,808.07
Discounted present value of terminal facilities and related obligation		$                9,238,846
Assuming that the present value of terminal facilities and related obligation at January 1, 2017, was $9,238,846, prepare journal entries for Novak Trucking to record the following: (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 125.)
Cash payment to the lessor on January 1, 2019.
Amortization of the cost of the leased properties for 2019, using the straight-line method and assuming a zero salvage value.
Accrual of interest expense at December 31, 2019.
Account Titles and Explanation	Debit	Credit
1)
Lease Obligation	$             968,000.00
Cash		$              968,000.00
(to record Cash Payment)
Depreciation Expense—Leased Assets ($9,238,846 ÷ 40)	$             230,971.15
Accumulated Depreciation—Leased Assets		$              230,971.15
(To record annual amortization expense on leased assets.)
Interest Expense	$             467,945.80
Interest Payable		$              467,945.80
(To record interest accrual on outstanding debt.)
Date	Lease Payment	Interest at 6%	Principal Reduction	Principal Balance
Jan 1 2017				$               9,238,845.93
Jan 1 2017	$             968,000.00	$                             -	$      968,000.00	$               8,270,845.93
Jan 1 2018	$             968,000.00	$              496,250.76	$      471,749.24	$               7,799,096.68
Jan 1 2019	$             968,000.00	$              467,945.80	$      500,054.20	$               7,299,042.48
Jan 1 2020	$             968,000.00	$              437,942.55	$      530,057.45	$               6,768,985.03

1) Prepare a schedule to compute for Novak Trucking the present value of the terminal facilities and related obligation at January 1, 2017. (Round answers to 0 decimal places, e.g. 125.) NOVAK TRUCKING COMPANY Schedule to Compute the Discounted Present Value of Terminal Facilities and the Related Obligation 42736 Present value of first 10 payments: Immediate payment Present value of an ordinary annuity Present value of last 10 payments: First payment Present value of an ordinary annuity Present value of last 10 payments Discount to January 1, 2017 968000 =B76.801692 =B7+B8 387200 =B10*6.801692 =B10+B11 =B12*0.558395 14 Discounted present value of terminal facilities and related obligation =C8+C13 16 Assuming that the present value of terminal facilities and related obligation at January Cash payment to the lessor on January 1, 2019. Amortization of the cost of the leased properties for 2019, using the straight-line meth Accrual of interest expense at December 31, 2019. Account Titles and Explanation Debit Credit 968000 Lease Obligation Cash (to record Cash Payment) =B22 =C14/40 Depreciation Expense-Leased Assets ($9,238,846 = 40) Accumulated Depreciation-Leased Assets (To record annual amortization expense on leased assets.) =B26 =C38 Interest Expense Interest Payable (To record interest accrual on outstanding debt.) =B30 Lease Payment Interest at 6% Principal Reduction 34 Date 35 Jan 1 2017 Jan 1 2017 Jan 1 2018 Jan 1 2019 39 Jan 1 2020 =B22 =B36 =B37 =B38 Principal Balance =C14 =E35-D36 =E36-D37 =E37-D38 =E38-D39 =E36*6% =E37*6% =E38*6% =B36 =B37-C37 =B38-C38 =B39-C39