On January 1, 2016, Caterpillar Inc. entered in a lease with Newmont Mining for
ID: 2423450 • Letter: O
Question
On January 1, 2016, Caterpillar Inc. entered in a lease with Newmont Mining for a 797F mining truck. The term of the non-cancelable lease is ten years and payments are required on January 1 of each year. The first payment is due on January 1, 2017. Additional terms of the lease are as follows:
1. Newmont Mining has an option to purchase the mining truck for $300,000 when the lease expires at which time the fair value is expected to be $1,200,000.
2. The cost of the 797F mining truck to Caterpillar is $3,500,000. It has an estimated life of fifteen years and a salvage value of zero at the end of its lease due to extreme wear and tear.
3. Caterpillar sets lease payments to earn 6% on its investment.
4. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Caterpillar.
5. Caterpillar has a 12-31 year-end.
Required:
1. Determine the lease payment.
2. Prepare a lease amortization schedule for both the lessor and the lessee for the entire life of the
lease.
3. Prepare the journal entries on the books of the lessor for the first and last year of the lease.
4. Prepare the journal entries on the books of the lessee for the first and last year of the lease.
Explanation / Answer
1. it is a Capital lease as the option to Buy the assets at a bargain price is avaialble to lessee.
2. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Caterpillar so it can be treated as a sell transacion .
The accounting treatment will be as under:
Journal Entry will be as under
The amortisation Table Year Date Payment interest6% Change in receivalbe/payable balance of receivable/payable 1 Jan1,2017 $ 300,000 Jan1,2017 $ 40,760 $(40,760) $ 259,240 Dec31,2017 15554.38 15554.38 $ 274,794 $ 274,794 2 Jan 1,2018 $ 40,760 $(40,760) $ 234,034 Dec31,2018 14042.02 14042.02 $ 248,076 $ 248,076 3 Jan 1,2019 $ 40,760 $(40,760) $ 207,315 Dec31,2019 12438.92 12438.92 $ 219,754 $ 219,754 4 Jan 1,2020 $ 40,760 $(40,760) $ 178,994 Dec31,2020 10739.63 10739.63 $ 189,733 $ 189,733 5 Jan 1,2021 $ 40,760 $(40,760) $ 148,973 Dec31,2021 8938.39 8938.385 $ 157,911 $ 157,911 6 Jan 1,2022 $ 40,760 $(40,760) $ 117,151 Dec31,202 7029.07 7029.066 $ 124,180 $ 124,180 7 Jan 1,2023 $ 40,760 $(40,760) $ 83,420 Dec31,2023 5005.19 5005.188 $ 88,425 $ 88,425 8 Jan 1,2024 $ 40,760 $(40,760) $ 47,665 Dec31,2024 2859.88 2859.877 $ 50,524 $ 50,524 9 Jan 1,2025 $ 40,760 $(40,760) $ 9,764 Dec31,2025 585.85 585.8471 $ 10,350 $ 10,350 10 Jan 1,2026 $ 40,760 $(40,760) $ (30,410) Dec31,2026 -1824.62 -1824.624 $ (32,235)