On January 1, 2015, ASK Enterprises leased specialized machinery from Banco Banks. The lease is a five-year lease with no anticipated residual value or bargain purchase options. The economic life of the machinery is five years. Banco Banks’ 9% implicit rate is known to ASK Enterprises. The lease payments, computed as follows, are due every year, beginning on December 31, 2015:
• A base payment of $ 250,000.
• An incremental payment of 0.01% of ASK’s annual sales.
• An incremental payment of $ 20 per year for every point in an industry- specific index. On January 1, 2015, the index was 189. ASK’s sales have averaged $ 245 million over the past 5 years. It anticipates an annual sales growth rate of 2% per year. ASK anticipates an annual increase in the industry- specific index of 4% per year.
1. The lease agreement between ASK Enterprises and Banco Banks includes two contingent rental agreements. Describe these.
2. Based on the U.S. GAAP standards found in ASC 840-10, Leases –Overall, how should the lessee treat the contingent rentals? 3. Provide the journal entry that ASK Enterprises will make at the inception of the lease. Also provide the amortization table through 2016.
4. Assume that annual sales for ASK Enterprises are $ 256 million in 2015. As of December 31, 2015, the index was 195. Provide the journal entry to record the lease payment on December 31, 2015.