You went to Aguamaint as planned on Monday, January 18. After reviewing Jerry's financials and vehicles cost schedule, you faxed him a list of your questions. Jerry called you the next morning indicating that he had the requested data ready, and you confirmed your afternoon meeting at Aguamaint’s new location. Having completed your research on the new issues for 20X2 and eaten a light lunch, you left for Aguamaint. Required:
Your questions and Jerry's responses are summarized here. After some research, you determined that the market rate of interest on debt comparable to Aguamaint’s new note was still 6% as of year-end. You and Linda Durkee had met for lunch after your latest discussion with Jerry since you wanted to ask her about the tax treatment for bad debt expense and deferred revenue. Jerry Loos had not recorded either, but you felt that he should have. Linda stated that the IRS does not recognize bad debt expense until accounts are actually written off, and they recognize advance payments as revenue when received. She also confirmed that the tax law allows lease payments for long-term leases to be deducted for the applicable months in the current calendar year, which is no different from the treatment of short-term leases. Using this information and Jerry’s responses below, determine the adjusting and correcting journal entries needed to report Aguamaint’s financial position in accordance with U. S. GAAP.
Requirement:
1. We noticed that the cost of leasing trucks has decreased to $24,600 for this year. Is this because you purchased the two new trucks? We also noticed that the lease payment on your new building is $39,000, which is much higher than you paid for your location last year. We are assuming you entered into a long-term lease when you moved, so we need some additional information from you to help us determine if this is an operating or a finance lease. How long is the lease? Will you own the building when the lease ends? Can you provide us with the fair value of the building and also the interest rate used to determine the annual payments? We also need to know the useful life of the building.
2. We no longer lease the trucks since we purchased and retooled the new ones. That $24,600 was incurred to rent trucks at the $150/day rate until we got the new trucks retooled. I agree that the $39,000 is a little high, but that’s the agreement that Nick and Ray negotiated. They settled on a 5.25% interest rate and a 10-year lease term. We only rent a little over half of the building, so will not own it at the end of the 10 years. I am pretty sure the building is worth well over a million dollars. It’s a relatively new building, so is not going to wear out anytime soon—certainly not within the next 50 years. We have a great location here, and the real estate prices just keep going up in this area. That is all the information I have. You can see that I recorded the lease payment correctly in the journal entries, and even allocated it between the shop and the office spaces. Why do you need all this detail? Do you want a copy of the lease?