Assignment
JT company is interested in leasing a truck from TR Truck Manufacturers starting February 1 2017 under these terms:
1. Lease term (fixed and noncancelable)
2. Transfer of title .......................................................... No
3. Lessee's normal depreciation method..................Straight Line
4. Executory costs ...................................................... None
5. Initial indirect costs ................................................... None
6. Annual rental to be made at the start of each year
7. Lessor's implicit interest rate ...................................... None
8. For each of the trucks the present value of the minimum lease payment is equal to 80% of the fair value of the truck at the inception of the lease.
Required
Consider the three leasing situations below. They are independent of each other.
a. Assume there are a bargain purchase option and a guaranteed residual value. The lease term is equal to 6 years and the economic useful life of the asset is 10 years.
b. Assume there are an unguaranteed residual value and no bargain purchase option. The lease term is equal to 9 years and the economic useful life of the asset is 10 years.
c. Assume there are no bargain purchase option and no guaranteed or unguaranteed residual value. The lease term is equal to 7 years and the economic useful life of the asset is 10 years.
(i) From JT's perspective, say what type of lease is represented by each of the above situations and explain your conclusions.
(ii) What amount should JT record as a liability at the inception of the lease for each of the three situations?
(iii) How should JT record minimum lease payment for each of the three situations?