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Railcar Leasing: Lessors' direct financing lease

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On January 1, 2005, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,345,540. Railcar Leasing, Inc. immediately leased the boxcars to the Reading Railroad Company (the lessee) on the same date. The lease calls for eight annual payments of $1,500,000 to be made at the beginning of each year (that is, the first payment is due at the inception of the lease on January 1, 2005). The boxcars have a remaining useful life of eight years, the lease contains no renewal or bargain purchase option, and possession of the boxcars reverts to the lessor at the end of the lease. The lease does not require the lessee to guarantee any residual value for the boxcars. The collectible of the payments is reasonably certain, and there are no important uncertainties regarding unreimbursable costs to be incurred by the lessor. The lessor has structured the lease to earn a rate of return of 12.0%

Required:

1. What method must Railcar Leasing Inc. use to account for the lease?
2. Prepare an amortization schedule for the lease for Railcar Leasing Inc. (Round all amounts to the nearest cent).
3. Make all journal entries for Railcar Leasing Inc. for 2005 and 2006. Assume that the company reports on a calendar-year basis.

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Please see the attached Excel file.

On January 1, 2005 Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,345,540. Railcar Leasing, Inc. immediately leased the boxcars to the Reading Railroad Company (the lessee) on the same date. The lease calls for eight annual payments of $1,500,000 to be made at the beginning of each year (that is, the first payment is due at the inception of the lease on January 1, 2005). The boxcars have a remaining useful life of eight years, the lease contains no renewal or bargain purchase option, and possession of the boxcars reverts to the lessor at the end of the lease. The lease does not require the lessee to guarantee any residual value for the boxcars. The collectability of the payments is ...

Solution Summary

A lessors' direct financing lease for Railcar leasing is examined.

$2.19