Problem $10$

Lessee with Guaranteed Residual Value

On January $1,1999,$ B Company leased a concrete truck with a fair value of $$265,000$ from E Company on the following terms.

a$.$ Noncancelable lease for $6$ years

b$.$ Lease payments of $$52,500$ per year. First payment is made on $1-1-19$xx$,$ and other payments are made on Dec. $31.$

c$.$ Estimated residual value is $$45,890$ and $B$ Company guarantees residual value.

d$.$ Estimated economic life of the truck is $9$ years.

e$.$ B$\text{'}$s incremental borrowing rate is $13\%$ a year. Implicit rate is $12\%.$

Required

Page $2$ of $4$

Is this a capital lease or operating lease. Why?

Instructions: Prepare journal entries on the books of the lessee through the first two years.

The accounting period of A and B Company ends on December $31.$