On January 2, 2008, Lexmark leased color-laser printers costing $450,000

On January 2, 2008, Lexmark leased color-laser printers costing $450,000

Question 1. On January 2, 2008, Lexmark leased color-laser printers costing $450,000 to Toyota for 3 years in
a non-cancellable term. The rental cost was $180,000 payable in advance on January 2 each year,
plus $3,000 annual executory-cost. At the end of the lease-term, Toyota can exercise a bargain
purchase option (BPO) of $40,000 for the printers. The estimated economic life is 5 years. The
salvage value will be $5,000 at the end of the economic life. Lexmark normally sells the same
laser printers to its customers for $575,000 cash. The implicit interest rate is 5 percent. This rate
is the same as the incremental borrowing rate for Toyota. Since Lexmark is in the business of
selling and financing printers, any lease contracts that are qualified for capital leases must be
classified as sales-type leases. Toyota is financial strong; it will fulfill any contractual
agreements. There are no hidden costs or surprises over the life of the lease-term.
.
Required:
(1) Prove that the lease is a capital lease for Lexmark (Lessor) as well as for Toyota (Lessee). State
the reason or reasons of your conclusion. Write the whole sentences. Don't just give me
fragments.

(2) Prepare lease amortization schedules for Lexmark and Toyota.
(3) Prepare the following journal entries for Lexmark and Toyota. Use the straight-line method to
amortize the leased printers. Cares must be taken that the lease is a sales-type for Lexmark:
(a)January 2, 2008, lease inception including the first lease payment;
(b)December 31, 2008, adjusting entries including the depreciation for the leased printers;
(c) January 2, 2009, the second lease payment;

(4) Prepare the following journal entries for Lexmark and Toyota on January 2, 2011:
(a) Toyota exercises the BPO on January 2, 2011;
(b) If Toyota fails to exercise the BPO but the residual value is guaranteed and drops to
$35,000, what are the journal entries for Lexmark and Toyota on January 2, 2011? (c) If
Toyota fails to exercise the BPO but the residual value is unguaranteed, what are the journal
entries for Lexmark and Ashland if the residual value drops to $35,000?

(5) If there is no BPO but the $40,000 is an unguaranteed residual value:
(a) What will be the journal entries for Lexmark and Toyota on January 2, 2008 at the time of
lease inception?
(b) What is the amount of leased equipment depreciation for Toyota each year?
(c) If the actual residual value on January 2, 2011 is only $35,000, what will be the journal entries
for Lexmark and Toyota?

(6) If there is no BPO but the $40,000 is a guaranteed residual value, what is the amount of leased
equipment depreciation for Toyota each year?