You just joined as the controller at BOB. Alicia, the VP Finance calls you in her office and mentions that they need your expertise on a newly signed lease agreement for a customized van that they’ve just signed with SOL. BOB and SOL are Companies that are publicly listed on the TSX. BOB manufactures, lease and sells van and SUVs. A 10-year agreement was signed between BOB and SOL on January 1, 2022 for a van that will be used in SOL’s taxi division. Annual payments of $2,900 are to be received on January 1 on each year. The collectability of the lease payments is not reasonably predictable and there are no important uncertainties about any un-reimbursable costs that have not yet been incurred by the lessor. BOB and SOL use the straight-line amortization for all assets on their books. The agreement guarantees exclusive usage of the van to SOL and the SOL can direct its use.

Alicia forwards you the contract and various email exchanges. You’re able to gather the following information from them:

SOL has the option to buy the van for $5,000 at the end of the lease term.

The remaining economic life of van at the time of signing the lease is 10 years at the end of which there is a residual value of $6,000. BOB has a 12 % Incremental borrowing rate and sets the equal annual rentals to ensure a 15% rate of return. SOL doesn’t know the rate of return of BOB but has an incremental borrowing rate of 12% as well. The residual value is not guarantee by SOL.

$550 was paid by SOL Inc. to a paralegal to draft the agreements.

The van was worth $30,000 when BOB purchased it. It was purchased cash at the time and has not been leased since its purchase.

The serial number on the van is 12345.

Required

Classify the lease as finance or operating lease. Evaluate each applicable classification criterion for the lessor.

Prepare the lease amortization schedule for any finance lease for the lessor.

Prepare all necessary journal entries in BOB’s books for that van for the 2022 year.

Prepare a partial income statement, a partial balance sheet and a partial statement of cash flows for 2022 showing the accounts and amounts related to the lease contract.

5. From the perspective of the lessee, please determine:

What classification would they give to the lease? Analyze each criteria

Prepare the appropriate amortization table (if necessary) and the journal entries related to the lease for the 2022 year.

Clearly state any necessary assumption and provide all your calculations.