Chapter 18, Problem 18.4P

Classification as Finance or Operating Lease, Lessor, Journal Entries, Sales-Type Lease, Annuity Due. On January 1, 2018, JLOU Company leases a fleet of stock delivery vehicles from Dolt Motors, Inc. Under the terms of the lease, JLOU must pay $65,000 on January 1 of each year, beginning on January 1,2018, over a 4-year term. The delivery vehicles have a useful life of 4 years. JLOU depreciates similar vehicles that it owns using the straight-line method. JLOU's incremental borrowing rate is 12%, and the 8% implicit rate in the lease is known to the lessee. The vehicles cost Dolt Motors $200,000 and have a fair value of $232,511. Dolt has no uncertainties as to future costs and collection. The lease terms do not contain a transfer of ownership, and there is no purchase option. There is also no residual value specified in the contract because no residual value is expected at the end of the lease term by the lessor. Assume that there are neither initial direct costs nor nonlease components related to the lease agreement.

Required

1. a. Classify this lease agreement for both the lessor and the lessee
2. b. Prepare the lease amortization table for the entire lease term
3. c. Prepare the journal entries necessary for Dolt Motors on January 1, 2018, and on December 31, 2018
4. d. Prepare the journal entries necessary for JLOU Company on January 1, 2018, and on December 31, 2018