Food$2$GoToday Inc. $($Food$2$GoToday or the $$Company$)$ is a public business entity and a

wholesale food and beverage distribution company with local and regional clients that benefit

from the Company$$s transportation of food and beverage products. The company owns a fleet of

trucks that it uses to transport the food and beverage products. The company may occasionally

enter into arrangements to secure additional trucks from third parties when its fleet of trucks is

not sufficient to fulfill its own requirements.

WeHaveFoodTrucks Inc. $($WeHaveFoodTrucks$)$ is a trucking company that supports wholesale

food and beverage distribution companies. WeHaveFoodTrucks owns a fleet of trucks that

transport nonperishable products and also owns one truck with refrigeration capabilities, which is

used for transporting perishable products. WeHaveFoodTrucks cannot source additional trucks

with refrigeration capabilities within a reasonable period. The truck with refrigeration facilities

is not customized or unique and can be used for other customers of WeHaveFoodTrucks without

incurring significant costs.

Food$2$GoToday entered into a three$-$year contract with WeHaveFoodTrucks to deliver

Food$2$GoToday$$s perishable food and beverage products, which commences on January $1,$

$20$X$2.$ The contract between Food$2$GoToday and WeHaveFoodTrucks does not identify the type

of vehicle used to fulfill the contract. WeHaveFoodTrucks is permitted to substitute the truck

during the contract term. A designated Food$2$GoToday driver will operate the truck for the

transportation of products and therefore will determine which products, when and where those

shipments will take place during the contract period. Certain restrictions prohibit the Company$$s

drivers from operating the truck beyond the maximum hours permitted by law or from carrying

illegal or hazardous materials as cargo.

The contract stipulates annual payments from Food$2$GoToday to WeHaveFoodTrucks for the

greater of $(1)$ $$1$ for every mile driven during the annual period or $(2)$ $$4,000$ each year. The

annual payments are to be paid at the end of each year. There are no options to renew the

contract at the end of the initial three$-$year period. In addition, Food$2$GoToday may purchase the

truck with refrigeration capabilities at the end of the contract period for the then fair value of the

truck. At the commencement of the contract, the truck is assumed to have a remaining useful life

of seven years and a fair value of $$65,000.$

Food$2$GoToday incurs $$4,000$ in initial direct costs by paying commissions to third$-$party brokers

in connection with securing the contract. As an incentive to enter into the contract,

WeHaveFoodTrucks offers to reimburse $$1,000$ of these fees.

Assume the following:

$$ Food$2$GoToday cannot readily determine the rate implicit in the contract.

$$ Food$2$GoToday$$s incremental borrowing rate is $6\mathrm{.}5$ percent.

$$ Neither Food$2$GoToday, as a potential lessee, nor any other third party provide any

residual value guarantee to WeHaveFoodTrucks.

Required:

$1.$ Does the contract contain a lease? Specifically:

a$.$ Is there an identified asset in the contract?

b$.$ If there is an identified asset, does the contract convey the right to control the

use of the identified asset to Food$2$GoToday throughout the period of use?

$2.$ If the contract contains a lease, what is the classification of the lease?

$3.$ If the contract contains a lease, what is the amount of Food$2$GoToday$$s right$-$of$-$use

asset and lease liability to be recognized at lease commencement?

$4.$ Assume Food$2$GoToday drove the truck $2,500$ miles each year. What are the journal

entries at the end of the first year $($December $31,20$X$2),$ second year $($December $31,$

$20$X$3),$ and third year $($December $31,20$X$4)?$