Sable Inc. is a company based in San Francisco, CA, that manufactures and supplies earthmoving and construction
Question:
Sable Inc. is a company based in San Francisco, CA, that manufactures and supplies earthmoving and construction equipment. Sable either sells the equipment to customers or leases it under terms specific to a customer’s needs. Build it Inc. is a growing construction company in Los Angeles, CA, that specializes in building residential properties.
Build it recently entered into a contract with Sable to lease a bulldozer, which Build it will use for a new project involving the construction of several condominiums in the Los Angeles area. The pertinent terms of the lease are as follows:
• The lease term is for 10 years, while the economic life of the bulldozer is estimated to be 15 years. The useful life of the bulldozer is also estimated to be 15 years.
• Annual lease payments of $16,000 are due at the end of each year. Build it is also responsible for all maintenance, insurance, and taxes arising from the lease of the bulldozer.
• The residual value of the bulldozer is estimated to be $24,000 at the end of the lease term. Sable does not have a residual value guarantee.
• The lease does not transfer ownership of the bulldozer to Build it by the end of the lease term or provide an option for Build it to purchase the equipment.
• The bulldozer costs Sable $100,000 to manufacture and this model is currently listed for sale at $135,000 should customers wish to purchase it outright
1. How should Sable classify the lease in its accounting records?
2. Provide the journal entries that Sable should record to:
a. Initially record the lease.
b. Account for the first lease payment made to Sable at the end of year 1.
International Financial Management
ISBN: 978-0078034657
6th Edition
Authors: Cheol S. Eun, Bruce G.Resnick