Sable Inc. (Sable) is a company based in San Francisco thatmanufactures and supplies earthmoving and construction equipment.Sable either sells the equipment to customers or leases it underterms specific to a customerâs needs. Buildit Inc. (Buildit) is agrowing construction company in Los Angeles that specializes inbuilding residential properties. Buildit recently entered into acontract with Sable to lease a bulldozer, which Buildit will usefor a new project involving the construction of severalcondominiums in the Los Angeles area. The pertinent terms of thelease are as follows: ⢠The lease term is for 10 years, while theeconomic life of the bulldozer is estimated to be 15 years. Theuseful life of the bulldozer is also estimated to be 15 years. â¢Annual lease payments of $16,000 are due at the end of each year.Buildit is also responsible for all maintenance, insurance, andtaxes arising from the lease of the bulldozer. ⢠The residual valueof the bulldozer is estimated to be $24,000 at the end of the leaseterm. Sable does not have a residual value guarantee. ⢠The leasedoes not transfer ownership of the bulldozer to Buildit by the endof the lease term or provide an option for Buildit to purchase theequipment. ⢠The bulldozer costs Sable $100,000 to manufacture, andthis model is currently listed for sale at $135,000 shouldcustomers wish to purchase it outright. Sable believes that thelease payments from Buildit will be collected when they are due. Inaddition, the equipment is fully constructed and no additionalcosts will be incurred to complete production of the bulldozerbefore lease commencement. As a result of a recent economicdownturn that has directly affected the construction industry, anumber of companies in the industry have modified their sales orlease terms to maintain profitability. Some of Sableâs directcompetitors have negotiated lower lease payments or reduced theirselling prices in an effort to stimulate sales. For example,several bulldozers with the same specifications as the one leasedto Buildit have recently sold for an average sales price of$125,000, as opposed to Sableâs current list price of $135,000. Therate implicit in the lease is 6.9336 percent assuming the fairvalue of the bulldozer is $125,000 at the beginning of the leaseterm and 5.45 percent assuming the fair value is $135,000.Required: 1. How should Sable classify the lease in its accountingrecords? 2. Provide the journal entries that Sable should recordto: a. Initially record the lease. b. Account for the first leasepayment made to Sable at the end of year 1
Sable Inc. (Sable) is a company based in San Francisco thatmanufactures and supplies earthmoving and construction equipment.Sable either sells the equipment to customers or leases it underterms specific to a customerâs needs. Buildit Inc. (Buildit) is agrowing construction company in Los Angeles that specializes inbuilding residential properties. Buildit recently entered into acontract with Sable to lease a bulldozer, which Buildit will usefor a new project involving the construction of severalcondominiums in the Los Angeles area. The pertinent terms of thelease are as follows: ⢠The lease term is for 10 years, while theeconomic life of the bulldozer is estimated to be 15 years. Theuseful life of the bulldozer is also estimated to be 15 years. â¢Annual lease payments of $16,000 are due at the end of each year.Buildit is also responsible for all maintenance, insurance, andtaxes arising from the lease of the bulldozer. ⢠The residual valueof the bulldozer is estimated to be $24,000 at the end of the leaseterm. Sable does not have a residual value guarantee. ⢠The leasedoes not transfer ownership of the bulldozer to Buildit by the endof the lease term or provide an option for Buildit to purchase theequipment. ⢠The bulldozer costs Sable $100,000 to manufacture, andthis model is currently listed for sale at $135,000 shouldcustomers wish to purchase it outright. Sable believes that thelease payments from Buildit will be collected when they are due. Inaddition, the equipment is fully constructed and no additionalcosts will be incurred to complete production of the bulldozerbefore lease commencement. As a result of a recent economicdownturn that has directly affected the construction industry, anumber of companies in the industry have modified their sales orlease terms to maintain profitability. Some of Sableâs directcompetitors have negotiated lower lease payments or reduced theirselling prices in an effort to stimulate sales. For example,several bulldozers with the same specifications as the one leasedto Buildit have recently sold for an average sales price of$125,000, as opposed to Sableâs current list price of $135,000. Therate implicit in the lease is 6.9336 percent assuming the fairvalue of the bulldozer is $125,000 at the beginning of the leaseterm and 5.45 percent assuming the fair value is $135,000.Required: 1. How should Sable classify the lease in its accountingrecords? 2. Provide the journal entries that Sable should recordto: a. Initially record the lease. b. Account for the first leasepayment made to Sable at the end of year 1
