Aquatran Incorporated uses leases as a method of selling its products. In early 2013, Aquatran completed construction of a passenger ferry for use between Manhattan and Staten Island. On April 1, 2013, the ferry was leased to the Manhattan Ferry Line on a contract specifying that ownership of the ferry will transfer to the lessee at the end of the lease period. Annual lease payments do not include executory costs. Other terms of the agreement are as follows:
Original cost of the ferry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500,000
Fair value of ferry at lease date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,107,102
Lease payments (paid in advance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225,000
Estimated residual value . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $78,000
Incremental borrowing rate-lessee . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10%
Date of first lease payment . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 1, 2013
Lease period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 years
Instructions:
1. Compute the amount of financial revenue that will be earned over the lease term and the manufacturer's profit that will be earned immediately by Aquatran.
2. Give the entry to record the signing of the lease on Aquatran's books. Compute the implicit rate of interest on the lease.
3. Give the journal entries necessary on Aquatran's books to record the lease for the first three years, exclusive of the initial entry. Aquatran's accounting period is the calendar year.
4. Indicate the balance of Lease Payments Receivable at December 31, 2015.