Accounting for capital leases versus purchased assets Ambrose Co. has the option of purchasing a new delivery truck for $42,300 in cash or leasing the truck for $9,150 per year, payable at the end of each year for six years. The truck also has a useful life of six years and will be depreciated on a straight line basis with no salvage value. The interest rate used by the lessor to determine the annual payments was 8%.
Required:
a. Assume that Ambrose Co. purchased the delivery truck and signed a six year, 8% note payable for $42,300 in satisfaction of the purchase price. Show in a horizontal model or write the entry that Ambrose should make to record the purchase transaction.
b. Assume instead that Ambrose Co. agreed to the terms of the lease. Show in a horizontal model or write the entry that Ambrose should make to record the capital lease transaction. Round your answer up to the nearest $1.
c. Show in a horizontal model or write the entry that Ambrose Co. should make at the end of the year to record the first annual lease payment of $9,150. Do not round your answers.
d. What expenses (include amounts) should Ambrose Co. recognize on the income statement for the first year of the lease?
e. How much would the annual payments be for the note payable signed by Ambrose Co. in part a?