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Item 12

Interstate Automobiles Corporation leased 40 vans to VIP Transport under a four-year noncancelable lease on January 1, 2021. Information concerning the lease and the vans follows: a. Equal annual lease payments of $300,000 are due on January 1, 2021, and thereafter on December 31 each year. The first payment was made January 1, 2021. Interstates implicit interest rate is 10% and known by VIP. b. VIP has the option to purchase all of the vans at the end of the lease for a total of $290,000. The vans estimated residual value is $50,000 at the end of 7 years, the estimated life of each van. c. VIP estimates the fair value of the vans to be $1,260,000.Interstates cost was $1,050,000. d. VIPs incremental borrowing rate is 9%. e. VIP will pay the maintenance fees not included in the annual lease payments of $1,000 per year. The amortization method is straight-line. Required: 1. If the vans estimated residual value is $300,000 at the end of the lease term, how should the lease be classified by VIP? by Interstate? 2. If the vans estimated residual value is $400,000 at the end of the lease term, how should the lease be classified by VIP? by Interstate? 3. Regardless of your response to previous requirements, suppose VIP recorded the lease on January 1, 2021, as a finance lease in the amount of $1,100,000 and that a bargain purchase option exists. What would be the appropriate journal entries related to the finance lease for the second lease payment on December 31, 2021?