In 2008, Yin Trucking Corporation, which follows private enterprise GAAP, 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, 2009, Yin Trucking Corporation took possession of the leased properties. On January 1, 2009, and 2010, the company made cash payments of $1,048,000 that were recorded as rental expenses.
Although the useful life of each terminal is 40 years, the non-cancellable lease runs for 20 years from January 1, 2009, with a purchase option available upon expiration of the lease.
The 20-year lease is effective for the period January 1, 2009, through December 31, 2028. Advance rental payments of $900,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of $320,000 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 million on December 31, 2028, although their fair value at that time is estimated at $3 million.
At the end of 40 years, the terminals and facilities will have no remaining value. Yin Trucking must also make annual payments to the lessor of $125,000 for property taxes and $23,000 for insurance. The lease was negotiated to assure the lessor a 6% rate of return.
Instructions
Answer the following questions, rounding all numbers to the nearest dollar.
(a) Using time value of money tables, a financial calculator, or computer spreadsheet functions, calculate for Yin Trucking Corporation the amount, if any, that should be capitalized on its January 1, 2009 balance sheet.
(b) Assuming a capital lease and a capitalized value of terminal facilities at January 1, 2009, of $8.7 million, prepare journal entries for Yin Trucking Corporation to record the following:
1. The cash payment to the lessor on January 1, 2011
2. Depreciation of the cost of the leased properties for 2011 using the straight-line method
3. The accrual of interest expense at December 31, 2011
(c) What amounts would appear on Yin’s December 31, 2011 balance sheet for the leased asset and the related liabilities under the lease arrangement described in part (b)?