On January 1, 2016, Temple Leasing Company (TLC) acquired a fleet of cars to be leased to Delaware River Company. TLC paid $ 275,000 to acquire the vehicles, which is also the fair value of the fleet. The lease terms are listed below:
• Annual rental payments of $ 57,900 are due at the beginning of each year, beginning on January 1, 2016. These are the minimum (“pure”) rental payments and do not include any executory costs.
• Lease term is five years.
• There is no residual value and no bargain purchase option.
• The economic life of the asset is five years.
• The lessee’s incremental borrowing rate and the lessor’s implicit rate are both 5%. TLC has no material uncertainties regarding future costs to be incurred under the lease and collectability is reasonably assured. Delaware Rivers depreciates similar vehicles owned using the straight- line method.
Required
a. Classify the lease as either a capital lease or an operating lease for Delaware River Company, the lessee.
b. Prepare the journal entries at lease inception and the first lease payment for the lessee.
c. Prepare an amortization table for the lease.
d. Prepare the journal entries at the end of the first year and for the second lease payment for Delaware River Company, the lessee.