Transprovincial Buslines experienced a major increase in the volume of its business in the last three months of 2011. Consequently, on January 1, 2012, the company leased a new bus from BigBus Leasing Ltd. Transprovincial could have purchased the bus for $400,000 but decided to lease it instead.
The 10-year lease agreement on the bus requires Transprovincial to pay $5,000 per month at the end of each month starting January 31, 2012. At the end of the lease term, title to the bus transfers to Transprovincial. The lease is structured with a 9% interest rate. The bus is expected to have a useful life of 15 years and will be depreciated on a straight-line basis with no anticipated residual value.
Required:
a. Is the above lease a finance lease or an operating lease? Explain why, referring to the criteria for classifying leases.
b. Assuming that Transprovincial records the lease on the bus as a finance lease, calculate the present value of the lease payments and give the journal entry that should be made to record the inception of the lease on January 1, 2012.
c. Should Transprovincial depreciate the bus over 10 years or over 15 years? Explain.
d. Assuming that Transprovincial records depreciation at the end of each month, give the journal entry that should be made to record depreciation for the months of January and February, 2012.
e. Give the journal entry that should be made to record the lease payments for January and February, 2012.
f. What amounts related to the lease would appear on Transprovincial's statement of earnings for the month of February, and on its statement of financial position as of the end of February?