On May 1, 2020, Baylor Corp. signed an agreement to lease a truck moving items around its manufacturing operation. The terms of the agreement were as follows:

• A seven year lease term with no provisions for renewals.
• $84,000 lease payments due at the beginning of each year of the lease. These payments include a charge for insurance ($2,000) and maintenance ($6,000) which the lessor immediately pays to third parties.
• The truck will revert to the lessor at the end of the lease term. The lessee guarantees a residual value at the end of the lease term of $60,000.
• The implicit interest rate for the lease was 7% (known to the lessee) and the lessee had an incremental borrowing rate of 6%.
• The fair market value of the asset is $489,620 at May 1, 2020. The useful life of the asset is 8 years. Baylor reports under ASPE and has a year-end of December 31.

Required: a) Calculate the present value of the lease payments, assuming it is a capital lease. (3 marks)

Data entry for calculator:

N	Answer
I/Y	Answer%
PMT	$Answer
FV	$Answer
TYPE	AnswerBGNEND Note: if you use excel BGN=1, END=0
CPT PV	$Answer

b) Write the journal entry or entries required on May 1, 2020, assuming it is a capital lease. (5 marks)

Capital lease journal entry:

Account Name	Debit	Credit
DR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue	$Answer
DR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue	$Answer
DR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue	$Answer
CR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue		$Answer
CR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue		$Answer
CR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue		$Answer

c) Write the journal entries required for depreciation and interest on December 31, 2020, assuming it is a capital lease. (4 marks)

Adjusting journal entries:

Account	Debit	Credit
Depreciation journal entry
DR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue	$Answer
CR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue		$Answer
Interest journal entry
DR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue	$Answer
CR. AnswerN/AAccumulated depreciation - TrucksAccumulated depreciation - Trucks under capital leaseAccounts payableAccounts receivableCashCommon sharesContributed surplusCost of salesDepreciation expenseInsurance expenseInterest expenseInterest payableInterest receivableInterest revenueLong-term debtObligations under lease - TruckPrepaid expenseRental expenseRepairs and maintenance expenseRetained earningsSalesTrucksTrucks under capital leaseUnearned interestUnearned revenue		$Answer

d) The lessor (Aggie Machine Works Ltd.) manufactures the truck itself at a cost of $300,000. (3 marks) i) How would Aggie classify the lease on its books as the lessor, assuming it is a capital lease? AnswerDirect financing typeSales type ii) How much revenue would Aggie recognize on the first day of the lease, if the residual value was not guaranteed? Revenue to be recognized on first day of lease: Answer