A. On 1/1/08 ABC Company leased Machine C for a period of 10 years. Fixed annual payments of $3,200 are required, which include executory costs of $200. The first annual payment is on 1/1/08, the inception of the lease. The remaining payments will be made on 12/31 of each year. A residual value of $3600 is anticipated by the lessor; $2,000 is also guaranteed by the ABC Company, the lessee. ABC Company’s incremental borrowing rate is 12%. The fair market value of Machine C is $20,500. Machine C will go back to the lessor at the end of the lease. The estimated life of Machine C is 15 years, with a residual value at the end of 15 years of $1,000.
B. Assume the same information as No. 1 above, but assume the payments are all on 1/1 with the first payment on 1/1/08.
C. On 1/1/16, ABC Company leased a car with a FMV of $45,000 for 5 years with a commitment to make 5 annual payments of $8,000 with the first payment due immediately and the remaining payments due on 12/31 of each year. ABC Company’s incremental borrowing rate is 12%. The estimated life of the car is 10 years. The car ownership does not transfer to ABC Company at the end of the lease and there is no bargain purchase option.
Required:
1. For each situation, present the accounts and dollar amounts that would appear on comparative balance sheets and income statements for the years ending 12/31/16 and 12/31/15.
2. List all accounts and dollar amounts. Round dollar amounts to the nearest dollar. You do not need to include cash.
3. For the Classification (Class:) column of the Balance Sheet use:
A for Asset
L for Liability
E for Equity
4. For the Classification (Class:) column of the Income Statement use:
R for Revenue
E for Expense