Question

Question: (Basic Lessee Accounting with Difficult PV Calculation) In 2016, Grishell Trucking Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company’s specifications on land owned by the company. On January 1, 2017, Grishell Trucking Company took possession of the lease properties. On January 1, 2017 and 2018, the company made cash payments of \(948,000 that were recorded as rental expenses.

Although the terminals have a composite useful life of 40 years, the noncancelable lease runs for 20 years from January 1, 2017, with a bargain-purchase option available upon expiration of the lease.

The 20-year lease is effective for the period January 1, 2017, through December 31, 2036. Advance rental payments of \)800,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of \(320,000 are due on January 1 for each of the last 10 years of the lease. The company has an option to purchase all of these leased facilities for \)1 on December 31, 2036. It also must make annual payments to the lessor of \(125,000 for property taxes and \)23,000 for insurance. The lease was negotiated to assure the lessor a 6% rate of return.

Instructions

(b) Assuming that the present value of terminal facilities and related obligation at January 1, 2017, was \(7,600,000, prepare journal entries for Grishell Trucking Company to record the:

2) A mortization of the cost of the leased properties for 2019 using the straight-line method and assuming a zero salvage value.

Selected present value factors are as follows.

Periods	For an Ordinary Annuity of \)1 at 6%	For $1 at 6%
1	.943396	.943396
2	1.83393	.889996
8	6.209794	.627412
9	6.801692	.591898
10	7.360087	.558395
19	11.158117	.330513
20	11.469921	.311805

Short answer

Answer

The accumulated depreciation-capital lease is$190,000.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Deprecation

Depreciation is a reduction in the price of a tangible assetthat affects the asset's monetary worth owing to a range of factors such as wear and tear from extended usage.

Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Depreciation Expense	190,000
	Accumulated Depreciation Capital Leases		190,000
	(To record the annual depreciation expense on leased assets)

Note: The leased asset is depreciated over its economic life because a bargain-purchase option is available at the end of the lease term.