The Provincial Star newspaper signed an agreement on January 1, 2011, to lease a truck for $800 per month for the next four years to deliver its newspapers. These payments are to be made on the last day of each month, and reflect an interest rate of 6% on the lease. The truck will be returned to the lessor at the end of the lease term. The Provincial Star depreciates its assets using the straight-line method and closes its books monthly.
Required:
a. Assuming that the truck's fair market value is $70,000 and its expected useful life is 10 years, how should the Provincial Star account for this lease? Explain, referring to the criteria for classifying leases.
b. Assuming that the truck's fair market value is $40,000 and its expected useful life is six years, how should the Provincial Star account for this lease? Explain, referring to the criteria for classifying leases.
c. Assuming that this lease should be classified as an operating lease:
i. Provide the appropriate accounting entries for the first two months of 2011.
ii. State what (if anything) the Provincial Star would indicate about this lease on its statement of financial position at the end of the first two months.
d. Assuming that this lease should be classified as a finance lease:
i. Provide the appropriate accounting entries for the first two months of 2011.
ii. Show what (if anything) the Provincial Star would indicate about this lease on its statement of financial position at the end of the first two months.