You just started as the Accountant of Whip-A-Milly-Rock (WMR) Ltd., a publicly listed company (NYSE). WMR is in the business of buying and selling armored vehicles to third world country leaders. Your boss comes to see you and asks you to provide him with an analysis of the impact that a new lease of an armored car to a foreign politician will have on the books.

WMR has a Year-End of December 31. The lease is a 5-year arrangement at the end of which there is a residual value of $20,000. The politician can choose to buy the car for an amount equal to its residual value at the end of the lease term. The remaining economic life of the car at the time of signing the lease is 6 years. WMR sets the equal annual rentals to ensure a 6% rate of return.

Per discussion with the Asset Accountant, you learn that this specific vehicle was purchased a few years ago by WMR for $400,000 and it now has a Fair Market Value of $200,000. It was purchased cash at the time and has not been leased since its purchase.

Per the contract the lease was signed on January 1 and payments are to be received on that date annually for the duration of the lease. The politician pays for the lease personally. As a taxable benefit, his political party guarantees the residual value of the car to WMR.

The collectability of the lease payments is not reasonably predictable and there are no important uncertainties about any un-reimbursable costs that have not yet been incurred by the lessor. The vehicle reverts back to WMR at the end of the lease term. WMR uses the straight-line amortization for all the cars on its books.

Required

What is the minimum rental payment (MRP) included in the lease contract between WMR and the politician?

Classify the lease as finance or operating lease. Evaluate each applicable classification criterion for the lessor.

Prepare the lease amortization schedule for any finance lease.

Prepare all necessary journal entries in WMRs books for that armored vehicle since it was purchased until December 31 2017.

Prepare a partial income statement, a partial balance sheet and a partial statement of cash flows for 2017 showing the accounts and amounts related to the lease contract.

Lets now assume that the items below change:

The residual value of the car at the end of the lease term is $50,000 and is unguaranteed

The car was specialized for usage by the politician

WMR was using ASPE for reporting purposes

What is the MRP (if it changes from above)? What would be the classification of the lease? Present each of the criterion that have changed from A) above. Would the journal entries for the 2017-year been different under this scenario? If so, prepare these journal entries for the 2017-year.

Clearly state any necessary assumption and provide all your calculations.