Question 1: Allied Package Express Service properly capitalized at $93,598 a large truck it had leased on January 1, 2011. The truck has a 14-year useful life. Title to the truck passes to Allied at the end of the 12-year lease term. Allied depreciates other similar trucks on the straight-line method with no salvage value. The lease agreement calls for annual payments of $11,500 at the beginning of each year of the lease term. The interest rate implicit in the lease (which is known by the lessee) is 8%.
How much depreciation and interest expense should Allied record for 2012?
Depreciation Interest
Expense Expense
a. $7,803 $6,568
b. $6,686 $6,568
c. $7,830 $6,173
d. $6,686 $6,173
Question 2: On July 1, 2011, Hawkeye Aviation leased two helicopters from Honnicutt Aircraft for an initial period of 12 months with a provision for a continuation on a month-to-month basis. The lease is properly classified as an operating lease. Lease payments are to be made as follows:
First two months ............................... $15,000 per month
Second three months ........................ 12,000 per month
Third three months ............................. 10,000 per month
Last four months ............................... 8,000 per month
After the first year, the rent continues at $6,000 per month. Provide the entries required to record the lease payments for the first year on the books of Hawkeye Aviation