Lauderdale Inc. leased a new dump truck to Fort Con-struction under a 5-year noncancelable contract starting January 1, 2014. Terms of the lease require payments of $30,000 each January 1, starting January 1, 2014. Lauderdale will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 10 years, a fair value of $150,000, and a cost to Lauder-dale of $150,000. The estimated fair value of the crane is expected to be $40,000 at the end of the lease term.No bargain-purchase or renewal options are included in the contract. Both Lauderdale and Fort adjust andclose books annually at December 31. Collectibility of the lease payments is reasonably certain, and nouncertainties exist relative to unreimbursable lessor costs. Fort‘s incremental borrowing rate is 10%, and Lauderdale‘s implicit interest rate of 8% is known to Fort.
(a) Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor.
(b) Prepare all the entries related to the lease contract and leased asset for the year 2014 for the lessee and lessor, assuming the following amounts.
1. Insurance $2,000
2. Taxes $2,800
3. Maintenance $900
4. Straight-line depreciation and salvage value $10,000.