ACCT - Question 3&4– Chapter 21 Problem - Truck Leasing Company and Baker Inc.

Question 3 – Chapter 21
Truck Leasing Company (TLC) buys trucks for leasing to various delivery companies. On April 1, 2010, TLC leases a truck to Showman Delivery Company. The cost of the truck of $289,875 and its fair value were the same. The lease payments stipulated in the lease are $40,000 per year in advance for the 10-year period of the lease. The expected economic life of the equipment is also 10 years. The title to the equipment remains in the hands of TLC at the end of the lease term, although only nominal residual value is expected at that time. Showman incremental borrowing rate is 5%, and it uses the straight-line method of depreciation on all owned equipment. Both Showman and TLC have fiscal year ending March 31, while lease payments are made on April 1 each year.
Required:
(a) Determine the rate implicit in the lease (4 points)

(b) Determine the present value of the minimum lease payments for the lessee. (6 points)

(c) Prepare the entries to record the lease and the first lease payment on the books of the lessor
and lessee, assuming the lease meets the criteria of a direct financing lease for the lessor and a capital lease for the lessee. (10 points)
(d) Other than those at (c ) above, prepare all entries required to account for the lease on both the
lessee’s and lessor’s books for the fiscal year 2011. (15 points)

Question 4 – Chapter 22
On December 31, 2010, before the books were closed, the management and accountants of Baker
Inc made the following determinations about three depreciable assets:

1. Depreciable asset A was purchased January 1, 2006. It originally cost $630,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2010 the decision was made to change the depreciation method from straight-line to sum-of-theyears’-digits, and the estimates relating to useful life and salvage value remained unchanged.

2. Depreciable asset B was purchased January 1, 2006. It originally cost $120,000 and was depreciated on the straight-line method basis. The asset was originally expected to be useful for 12 years and have a zero salvage value. In 2010, the decision was made to shorten the total life of this asset to 9 years and to estimate the salvage value at $3,000.

3. Depreciable asset C was purchased January 1, 2006. The asset’s original cost was $170,000, and this amount was entirely expensed in 2006. This particular asset has a 10-year useful life and no salvage value. The straight-line method was used for depreciation.
Additional data:
• Income in 2010 before depreciation expense amounted to $380,000
• Depreciation expense on assets other than A, B, and C totaled $60,000 in 2010.
• Income in 2009 was reported at $360,000
• Ignore all income tax effects.
• 200,000 shares of common stock were outstanding in 2009 and 2010.

Required:
a) Prepare all necessary journal entries in 2010 to record these determinations. (12 points)
b) Prepare comparative retained earnings statements for Baker Inc for 2009 and 2010. The company had retained earnings of $190,000 at December 31, 2008. (10 points)