Question

2. 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 1st, 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 31st 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. a. Prepare Caterpillar’s JEs on January 1, 2019 for this Sales-Type Lease with Selling Profit. b. Prepare Caterpillar’s JE on December 31, 2019 for the receipt of the second payment under this lease. c. Compute the total impact of these leasing transactions on Caterpillar’s net income for 2019 (ignore income taxes).

Answer 1

Alternative 2

It is mentioned that salvage value was expected to be $50,000 after end of estimate useful life of the equipment of 10 years.

The residual value at the end of lease term is not mentioned, hence if we assume it to be zero the answer will change as follows