Question

1. Sales-Type lease with Selling Profit – Lessor. (Note: This is the exact same information from the previous problem, but we’ll look at it from the standpoint of the Lessor.) On January 1^st, 2019 Brook Paving Co leased a road-paving machine from Caterpillar Co. for 7 years, with annual payments of $506,986 due at the signing of the lease, and then at December 31^st for the next 6 years. The equipment had normal sales price of $3,000,000. The interest rate implicit in the lease is 6%. At the end of the lease, title to the equipment transfers to Asphalt Paving Co. The estimate useful life of the equipment was 10 years, after which its salvage value was expected to be $50,000. Caterpillar’s cost of the equipment was $2.5 million.
   1. Prepare Caterpillar’s JEs on January 1, 2019 for this Sales-Type Lease with Selling Profit.
   2. Prepare Caterpillar’s JE on December 31, 2019 for the receipt of the second payment under this lease.
   3. Compute the total impact of these leasing transactions on Caterpillar’s net income for 2019 (ignore income taxes).

Answer 1

Alternate 2

Its given that salvage value of 10,000 is after end of useful life of 10 years.Residual value at end of lease term is not given. if it is considered as Nil the answer will change as below