Garcia Orchards & Processing Company has been taking bids for three new tractors. Goldbaum Equipment has made an offer to sell a qualifying model for $41,000 each. In addition, Goldbaum has offered to finance the transaction through a capital lease over the expected 15-year life of the tractors with no money down. No mention of the size of the required year-end lease payments has been made yet, but Garcia knows that Goldbaum will expect a 9% return on the lease arrangement.

Required

If Garcia accepts this option:

A. What will be the size of each annual year-end lease payment?

B. What amount will Garcia capitalize on its balance sheet for the tractors and for the lease obligation? What does this amount represent?

C. Using the format presented in this chapter, record the entry to set up the lease on Garcia’s books.

D. What total amount will Garcia pay over the life of the lease for financing?

E. Using the format presented in this chapter, record the entry necessary when Garcia makes the first lease payment.

F. When the second year’s lease payment is recorded, will the amount of interest expense be larger or smaller than that for the first year? Explain.