On January 1 Holt National Bank HNB acquired a fleet

#3254
On January 1, Holt National Bank (HNB) acquired a fleet of trucks to be leased to J Rivers
Company. HNB paid $ 99,999 to acquire the vehicles, which is also the fair value of the fleet.
The lease terms are listed below:• Annual rental payments of $ 34,972 are due at the beginning
of each year. These are the minimum (“pure”) rental payments and do not include any
executory costs.• Lease term is three years.• There is no residual value and no bargain
purchase option.• The economic life of the asset is three years.• The lessor’s 5% implicit rate
is known to J Rivers Company.• The lessee’s incremental borrowing rate is 6%.• Annual
maintenance is $ 800 and annual property tax is $ 500. The lessee pays both at the end of the
year. HNB has no material uncertainties regarding future costs to be incurred under the lease
and collectability is reasonably assured. J Rivers depreciates similar vehicles owned using the
straight- line method.Requireda. Classify the lease as either a capital lease or an operating
lease for J Rivers Company, the lessee.b. Prepare the journal entries for the first year of the
lease for J Rivers Company, the lessee. . View Solution:
On January 1 Holt National Bank HNB acquired a fleet

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