Garcia Orchards & Processing Company has been taking bidsfor three new tractors. Goldbaum Equipment has made an offer tosell a qualifying model for $ 41,000 each. In addition, Goldbaumhas offered to finance the transaction through a capital lease overthe expected 15- year life of the tractors with no money down. Nomention of the size of the required year- end lease payments hasbeen made yet, but Garcia knows that Goldbaum will expect a 9%return on the lease arrangement.
Required If Garcia accepts this option:
A. What will be the size of each annualyear- end lease payment?
B. What amount will Garcia capitalize onits balance sheet for the tractors and for the lease obligation?What does this amount represent?
C. Using the format presented in thischapter, record the entry to set up the lease on Garcia'sbooks.
D. What total amount will Garcia payover the life of the lease for financing? (Hint): You do not needto prepare an amortization table.)
E. Using the formatpresented in this chapter, record the entry necessary when Garciamakes the first lease payment.
F. When the second years leasepayment is recorded, will the amount of interest expense be largeror smaller than that for the first year? Explain.