In
2008, Yin Trucking Corporation, which follows private enterprise GAAP,
negotiated and closed a long-term lease contract for newly constructed truck
terminals and freight storage facilities. The buildings were erected to the company’s
specifications on land owned by the company. On January 1, 2009, Yin Trucking
Corporation took possession of the leased properties. On January 1, 2009, and
2010, the company made cash payments of $1,048,000 that were recorded as rental
expenses.
Although
the useful life of each terminal is 40 years, the non-cancellable lease runs
for 20 years from January 1, 2009, with a purchase option available upon
expiration of the lease.
The
20-year lease is effective for the period January 1, 2009, through December 31,
2028. Advance rental payments of $900,000 are payable to the lessor on January
1 of each of the first 10 years of the lease term. Advance rental payments of
$320,000 are due on January 1 for each of the last 10 years of the lease. The
company has an option to purchase all of these leased facilities for $1 million
on December 31, 2028, although their fair value at that time is estimated at $3
million.
At
the end of 40 years, the terminals and facilities will have no remaining value.
Yin Trucking must also make annual payments to the lessor of $125,000 for
property taxes and $23,000 for insurance. The lease was negotiated to assure
the lessor a 6% rate of return.
Instructions
Answer
the following questions, rounding all numbers to the nearest dollar.
(a)
Using time value of money tables, a financial calculator, or computer
spreadsheet functions, calculate for Yin Trucking Corporation the amount, if
any, that should be capitalized on its January 1, 2009 balance sheet.
(b)
Assuming a capital lease and a capitalized value of terminal facilities at
January 1, 2009, of $8.7 million, prepare journal entries for Yin Trucking
Corporation to record the following:
1.
The cash payment to the lessor on January 1, 2011
2.
Depreciation of the cost of the leased properties for 2011 using the
straight-line method
3.
The accrual of interest expense at December 31, 2011
(c)
What amounts would appear on Yin’s December 31, 2011 balance sheet for the
leased asset and the related liabilities under the lease arrangement described
in part (b)?
(a) YIN TRUCKING CORPORATION
Schedule to Calculate the
Discounted Present Value of
Terminal Facilities and the
Related Obligation
January 1,
2009
Present value of first 10 payments:
Present value
of an annuity due for
10 years at 6% ($900,000 X 7.80169) $7,021,521
Present value of last 10 payments:
Present value
of an annuity due for
10 years at 6% ($320,000 X 7.80169) 2,496,541
Discounted
to January 1, 2009
($2,496,541 X .558395) 1,394,056
Present
value of bargain purchase option
of
($1,000,000 X .31180) 311,800
Present
value of terminal
facilities and related obligation $8,727,377
(For the
last ten periods, the present value of an annuity due for 20 periods less the
present value of an annuity due for 10 periods can be used as follows:
([12.15812 – 7.80169] X $320,000 = $1,394,056).
|
Excel formula =PV(rate,nper,pmt,fv,type)
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Present value of the first ten years of annuity of
$900,000 is $7,021,523
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Using a financial calculator:
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||
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PV
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$ ?
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Yields $7,021,523.05
|
|
I
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6%
|
|
|
N
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10
|
|
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PMT
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$
(900,000)
|
|
|
FV
|
$
0
|
|
|
Type
|
1
|
|
Present value (at end of first ten years of the next
ten year annuity of $320,000 is $2,496,541
|
Using a financial calculator:
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||
|
PV
|
$ ?
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Yields $2,496,541
|
|
I
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6%
|
|
|
N
|
10
|
|
|
PMT
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$
(320,000)
|
|
|
FV
|
$
0
|
|
|
Type
|
1
|
|
Calculate the present value of single amount of $2,496,541
for ten years at 6% and obtain $1,394,056
|
Using a financial calculator:
|
||
|
PV
|
$
?
|
Yields $1,394,056
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|
I
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6%
|
|
|
N
|
10
|
|
|
PMT
|
$
0
|
|
|
FV
|
$
(2,496,541)
|
|
|
Type
|
1
|
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(b) YIN TRUCKING CORPORATION
Journal
Entries
2011
(1) 1/1/11
Interest Payable..................... 442,080
Lease Obligation..................... 457,920
Property Taxes Expense............... 125,000
Property Insurance Expense........... 23,000
Cash............................. 1,048,000
Partial Amortization
Schedule
(Annuity Due
Basis)
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Date
|
|
Lease
Payment
|
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Executory
Costs
|
|
Interest
at
6%
|
|
Principal
Reduction
|
|
Principal
Balance
|
|
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|
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|
|
|
|
|
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|
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1/1/09
1/1/09
1/1/10
1/1/11
1/1/12
|
|
—
$1,048,000
1,048,000
1,048,000
1,048,000
|
|
—
$148,000
148,000
148,000
148,000
|
|
—
$ 0
468,000
442,080
414,605
|
|
—
$900,000
432,000
457,920
485,395
|
|
$8,700,000
7,800,000
7,368,000
6,910,080
6,424,685
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(2) 12/31/11
Depreciation Expense—Leased Assets... 217,500
Accumulated
Depreciation—Leased
Assets......................... 217,500
(To record annual depreciation expense
on leased assets) ($8,700,000 ÷ 40)
(3) 12/31/11
Interest Expense..................... 414,605
Interest
Payable................. 414,605
(To record interest accrual at 6% on outstanding debt
of $6,910,080)
(c) Yin’s balance sheet at December 31, 2011 would
show the following:
Property plant and equipment
Leased Terminal $8,700,000
Accumulated
depreciation 652,500*
8,047,500
Current liabilities:
Interest payable $442,080
Current portion of lease obligation 457,920
Long-term
liabilities:
Lease obligation 6,910,080
* $217,500 X
3 years
