Chapter 18, Problem 18.10E

Classification as Finance or Operating Lease, Lessee, Journal Entries. On January 1, 2018, Temple Leasing Company (TLC) acquired a fleet of stock vehicles to be leased to Delaware River Company. TLC paid $275,000 to acquire the vehicles, which is also the fair value of the fleet. The lease terms follow:

• Annual rental payments of $57,900 are due on January 1 of each year, beginning on January 1, 2018. The lease agreement does not include any nonlease components.
• The lease term is 5 years
• There is no residual value and no purchase option.
• The economic life of the asset is 5 years.
• The lessee s incremental borrowing rate is 5% and the lessee does not know the lessor's implicit rate.

TLC indicates that collectability of all lease payments is reasonably assured. Delaware Rivers depreciates similar vehicles that it owns using the straight-line method.

Required

1. a. Classify the lease as either a finance lease or an operating lease for Delaware River Company, the lessee.
2. b. Prepare the journal entries at lease commencement and the first lease payment for the lessee.
3. c. Prepare an amortization table for the lease.
4. d. Prepare the journal entries at the end of the first year and for the second lease payment for Delaware River Company, the lessee.