Problem
For some time, Ulrich Inc. has maintained a policy of acquiring company equipment by leasing. On January 1, 2015, Ulrich entered into a lease with Riverbottoms Fabricators for a new concrete truck that had a selling price of $315,000. The lease stipulates that annual payments of $61,800 will be made for six years. The first lease payment is made on January 1, 2015, and subsequent payments are made on December 31 of each year. Ulrich guarantees a residual value of $33,535 at the end of the six-year period. Ulrich has an incremental borrowing rate of 11%, and the implicit interest rate to Riverbottoms is 10% after considering the guaranteed residual value. The economic life of the truck is eight years. Ulrich uses the calendar year for reporting purposes and straight-line depreciation to depreciate other equipment.
1. Compute the amount to be capitalized as an assett on the lessee's books for the concrete truck. Ulrich knows that Riverbottoms' implicit interest rate is 10%.
2. Prepare a schedule showing the reduction of the liability by the annual payments after considering the interest charges.
3. Give the journal entries that would be made on Ulrich's books for the first two years of the lease.
4. Assume that the lessor sells the truck for $24,000 at the end of the six-year period to a third-party. Give the Ulrich journal entries necessary to record the payment to satisfy the residual guarantee and to write off the leased equipment accounts.