Question

Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction Corp. sign a lease agreement dated January 1, 2017, that calls for Caterpillar to lease a front-end loader to Sterling beginning January 1, 2017. The terms and provisions of the lease agreement, and other pertinent data, are as follows.

• The term of the lease is five years. The lease agreement is non-cancelable, requiring equal rental payments at the beginning of each year (annuity-due basis).

• The loader has a fair value at the inception of the lease of $50,000, an estimated economic life of five years, and no residual value of the loader at the end of the lease. Further, assume that the underlying asset has an $42,500 cost to the dealer, Caterpillar.

• The lease contains no renewal options. The loader reverts to Caterpillar at the termination of the lease.

• Collectability of payment by Caterpillar is probable.

• Caterpillar sets the annual rental payment to earn a rate of return of 4% per year (implicit rate) on its investment

Required：

1.Prepare a partial Balance Sheet for Caterpillar Finance as December 31, 2017

2.Prepare a partial Income Statement for Caterpillar Finance as December 31, 2017

3. Prepare journal entry to record the return of leased asset to Caterpillar on January 1, 2022

Answer 1