Question

In 2016, Concord 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, Concord Trucking Company took possession of the lease properties. On January 1, 2017 and 2018, the company made cash payments of $ 1,109,160 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 $ 936,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of $ 374,400 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 $ 146,250 for property taxes and $ 26,910 for insurance. The lease was negotiated to assure the lessor a 6% rate of return.

Selected present value factors are as follows.

For an Ordinary

Periods	Annuity of $1 at 6%	For $1 at 6%
1	0.943396	0.943396
2	1.833393	0.889996
8	6.209794	0.627412
9	6.801692	0.591898
10	7.360087	0.558395
19	11.158116	0.330513
20	11.469921	0.311805

1) Prepare a schedule to compute for Concord Trucking Company the discounted present value of the terminal facilities and related obligation at January 1, 2017.

Concord Trucking Company
Schedule to Compute the Discounted Present Value of Terminal Facilities and the Related Obligation
January 1st 2017

Present Value of First 10 Payments:
Immediate Payment	$XXXX
Present Value of an Ordinary Annuity	$XXXX	$XXXX
Present Value of Last 10 Payments:
First Payment	$XXXX
Present Value of an Ordinary Annuity	$XXXX
Present Value of Last 10 Payments	$XXXX
Discount		$XXXX
Discounted Present Value of Terminal Facilities and Related Obligations		$XXXX

2) Assuming that the present value of terminal facilities and related obligation at January 1, 2017, was $ 8,892,000, prepare journal entries for Concord Trucking Company to record the: (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 125.)
1) Cash payment to the lessor on January 1st, 2019.
2) Amortization of the cost of the leased properties for 2019.
3) Accrual of interest expense at December 31st, 2019.

Answer 1

Answer:

Present Value of Cash Outflow under purchase option is as given in the question $ 7,454,000

Present Value of Cash Outflows under Lease Option can be calculated by discounting the 20 years lease rental payments using the discounting factors for 9% as cost of capital. The calculations are as follow;

Discounting Factor for 1st 10 years = [(1/1.09)^1 + ....... + (1/1.09)^10] = 6.14765

Discounting Factor for 11th to 20th year = [(1/1.09)^11 + ....... + (1/1.09)^20] = 2.71088

So, the Present Value of Cash Flows under Lease Payment = $ 773,000 * 6.14765 + $ 391,000*2.71088 = $ 6,020,806.598 or $ 6,020,807