PROBLEM B.6

Capital Leases: A Comprehensive Problem

Custom Truck Builders frequently uses long-term capital lease contracts to finance the sale of its trucks (also referred to as Type A leases). On November 1, 2021, Custom Truck Builders leased to Interstate Van Lines a truck carried in the perpetual inventory records at $33,520. The terms of the lease call for Interstate Van Lines to make 36 monthly payments of $1,400 each, beginning on November 30, 2021. The present value of these payments, after considering a built-in interest charge of 1 percent per month, is equal to the regular $42,150 sales price of the truck. At the end of the 36-month lease, title to the truck will transfer to Interstate Van Lines.

Instructions

Prepare journal entries for 2021 in the accounts of Custom Truck Builders on:

November 1, to record the sale financed by the lease and the related cost of goods sold. (Debit Lease Payments Receivable for the $42,150 present value of the future lease payments.)

November 30, to record receipt of the first $1,400 monthly payment. (Prepare a compound journal entry that allocates the cash receipt between interest revenue and reduction of Lease Payments Receivable. The portion of each monthly payment recognized as interest revenue is equal to 1 percent of the balance of the account Lease Payments Receivable, at the beginning of that month. Round all interest computations to the nearest dollar.)

December 31, to record receipt of the second monthly payment.

Prepare journal entries for 2021 in the accounts of Interstate Van Lines on:

November 1, to record acquisition of the leased truck.

November 30, to record the first monthly lease payment. (Determine the portion of the payment representing interest expense in a manner parallel to that described in part a.)

December 31, to record the second monthly lease payment.

December 31, to recognize depreciation on the leased truck through year-end. Compute depreciation expense by the straight-line method, using a 10-year service life and an estimated salvage value of $6,150.

Compute the net carrying value of the leased truck in the balance sheet of Interstate Van Lines at December 31, 2021.

Compute the amount of Interstate Van Liness lease payment obligation at December 31, 2021.