On January 1, 2019, Your National Bank (YNB) acquired a fleet of trucks to be leased to J Forests Company. YNB paid $117,160 to acquire the vehicles, which is also the fair value of the fleet. The lease terms follow.

•	Annual rental payments of $41,000 are due on January 1 of each year.
•	Lease term is 3 years.
•	There is no residual value and no purchase option.
•	The economic life of the asset is 3 years.
•	The lessee's incremental borrowing rate is 6%; and thelessor's implicit rate is not known to J Forests Company.
•	Included in the rental payments are annual sales taxes and maintenance. Annual sales taxes equal $750 paid to the lessor on January 1 of the year and represent a lease component. Annual maintenance is $900 and is paid to the lessor at the beginning of the year. The maintenance is a nonlease component, and the lessee elected not to allocate the consideration to the lease and nonlease components due to immateriality. The lessee has elected to account for each separate lease and nonlease component as a single component.
•	YNB has no material uncertainties regarding future costs to be incurred under the lease, and collectability is reasonably assured. J Forests depreciates similar vehicles that it owns using the straight-line method.

Requirement 

a. Classify the lease as either a finance lease or an operating lease for J Forests Company, the lessee.

Before completing the requirement, identify the present value of the lease payments. (Use the present value and future valuetables, the formula method, a financial calculator, or a spreadsheet for your calculation. If using present and future value tables or the formula method, use factor amounts rounded to five decimal places, X.XXXXX. Round your final answer to the nearest whole dollar.)

The present value (PV) of the payments due under the lease is $

.

Classify this lease agreement as an operating or a finance lease.

Begin by identifying any of the Group I criteria that Forests meets. (Select all that apply.)

1. The lease transfers ownership to the lessee at the end of the lease term.

2. The lessee is given an option to purchase the asset that the lessee is reasonably certain to exercise.

3. The lease term is for a major part of the economic life of the asset.

4. The present value of the sum of the lease payments and any residual value the lessee guarantees to pay (that is not otherwise included in the lease payment) is equal to substantially all of the asset's fair value.

5. The leased asset is of a specialized nature.

6. The lease does not meet any Group I lease criteria.

This is a(n)

▼

finance

operating

lease for the lessee (J

Forests

Company) because

▼

all five

at least one

at least three

none

of the Group I criteria is(are) met.

Requirement 

b. Prepare the journal entries for the first year of the lease for J Forests Company, the lessee. (Round all amounts to the nearest whole dollar. Record debits first, then credits. Exclude explanations from any journal entries.) Begin by preparing the entry at the lease commencement date on January 1, 2019.

Exclude the first annual lease payment from this entry. We will record that payment in the next step.

Account	January 1, 2019

Prepare the entry for the first annual lease payment made on January 1, 2019.

Account	January 1, 2019

Record J Forests' year end interest accrual related to the lease on December 31, 2019.

(Round all amounts to the nearest whole dollar.)

Account	December 31, 2019

Record J Forests' entry for amortization on the leased trucks on December 31, 2019.

(Round all amounts to the nearest whole dollar.)

Account	December 31, 2019

Prepare the entry for the second annual lease payment made on January 1, 2020.

Account	January 1, 2020

Answer rating: 100% (QA)

a Classify the lease as either a finance lease or an operating lease for J Forests Company the lessee Before completing the requirement identify the p... View the full answer