Problem 5A-1 (LO 7) 80%, equity, financing leases with unguaranteed residual, fixed asset profit. Steven Truck Company has been an 80%-owned subsidiary of Paulz Heavy Equipment since January 1, 20X3, when Paulz purchased 128,000 shares of Steven common stock for $832,000, an amount equal to the book value of Steven's net assets at that date. Steven's net income and dividends paid since acquisition are as follows:
Year Net Income Dividends
20X3 $70,000 $25,000
20X4 75,600 25,000
20X5 81,650 30,000
On January 1, 20X5, Paulz leased a truck from Steven. The 3-year financing-type lease provides for payments of $10,000 each January 1. On January 1, 20X5, the present value of the truck at Steven's 8% implicit rate, including the unguaranteed residual value of $6,000 at the end of the third year, was $32,596. Paulz also has used the 8% implicit rate to record the lease. The truck is being depreciated on a straight-line basis.
On January 1, 20X6, Steven signed a 4-year financing-type lease with Paulz for the rental of specialized production machinery with an 8-year life. There is a $7,000 purchase option at the end of the fourth year. The lease agreement requires lease payments of $30,000 each January 1 plus $1,500 for maintenance of the equipment. It also calls for contingent payments equal to 10% of Steven's cost savings through the use of this equipment, as reflected in any increase in net income (excluding gains or losses on sale of assets) above the previous growth rate of Steven's net income. The present value of the equipment on January 1, 20X6, at Paulz's 10% implicit rate was $109,388.
2. On January 1, 20X4, Swampy purchased a machine for $14,000 and leased it to Patter Inc. The 4-year lease qualifies as a capital lease. The rentals are $5,000 per year, payable at the beginning of each year. There is a bargain purchase option whereby Patter will purchase the machine at the end of 4 years for $2,000.
The fair value of the machine was $17,560 at the start of the lease term. The lease payments, including the purchase option, yield an implicit rate of 15% to the lessor. Patter is depreciating the machine over 7 years on a straight-line basis with no salvage value.
3. On January 1, 20X5, Swampy purchased a truck for $23,116 and leased it to Patter Inc. under a 3-year capital lease. Payments of $8,000 per year are required at the beginning of each year. There is a bargain purchase agreement for $5,000. Patter Inc. is depreciating the truck over 4 years, straight-line with no salvage value. The lease has a lessor implicit rate of 20%.
4. Patter Inc. has accrued interest in 20X5 on its capital lease obligations. Swampy has recognized earned interest for the year on its capital leases.
Prepare the worksheet necessary to produce the consolidated financial statements of Patter Inc. and its subsidiary for the year ended December 31, 20X5. Include the determination and distribution of excess and income distribution schedules.
On October 1, 20X6, Steven sold Paulz a warehouse having a 20-year remaining life, a book value of $135,000, and an estimated salvage value of $20,000. Paulz paid $195,000 for the building, which is being depreciated on a straight-line basis.
The trial balances were prepared by the separate companies on December 31, 20X6.
Accounts Receivable (net)
Minimum Lease Payments Receivable . . .
Unguaranteed Residual Value
Unearned Interest Income
Assets under Capital Lease
Accumulated Depreciation—Assets under
Property, Plant, and Equipment
Accumulated Depreciation—Property, Plant, and Equipment
Investment in Steven Truck Company . . . .
Obligations under Capital Lease
Gain on Sale of Assets
Cost of Goods Sold
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