Provide the journal entries that Samuel Co. would record to (1) initially record the lease and (2) account for the first lease payment made to Samuel Co. at the end of year 1 for both alternatives:

Alternative 1 The lease should be classified as an operating lease.

Alternative 2 The lease should be classified as a sales-type lease.

Samuel Co. Lease Case: Lessor Accounting for Lease of Construction Equipment

Based in Portland, OR, Samuel Co. manufactures and supplies construction equipment. Samuel sells the equipment to customers or leases it under specified terms for a customers needs. Benito Construction Corp., located in in Bend, OR, is a growing construction company specializing in both residential and commercial properties.

Benito Construction Corp. recently entered into a contract with Samuel to lease a dump truck, which Benito Construction Corp. will use for a new project involving the construction of several factories in the Bend/Redmond area. Terms of the lease include the following:

The lease does not transfer ownership of the dump truck to Benito Construction Corp. at the end of the lease term. The lease does not provide an option for Benito Construction Corp. to purchase the equipment.

The lease term is for 10 years, while the economic life of the dump truck is estimated to be16 years. The useful life of the dump truck is also estimated to be 16 years.

Annual lease payments of $16,000 are due at the end of each year. Benito Construction Corp. is responsible for all maintenance, insurance, and taxes arising from the lease of the dump truck.

The residual value of the dump truck is estimated to be $24,000 at the end of the lease term. Samuel does not have a residual value guarantee.

The dump truck costs Samuel $94,300 to manufacture and the model is currently listed for sale at $135,000 should customers wish to purchase it outright.

The rate implicit in the lease is 6.93% assuming the fair value of the dump truck is $125,000 at the beginning of the lease term and 5.45% assuming the fair value is $135,000.

Samuel believes that the lease payments from Benito Construction Corp. will be collected when they are due.

The equipment is fully constructed and no additional costs will be incurred to complete production of the dump truck before lease commencement.

Resulting from the economic downturn that recently impacted the residential and commercial construction industry, many companies in the industry modified their lease terms or sales to maintain profitability. Direct competitors of Samuel Co. have negotiated lower lease payments or reduced their selling prices to stimulate sales. For example, numerous dump trucks with the same specifications as the one leased to Benito Construction Corp. have recently sold for sales prices averaging $125,000, as compared to Samuels current list price of $135,000.