2. (20 points) Citibank Corporation leased 10 trucks to Lehigh Service Company under a 4-year
noncancelable lease on January 1, 2025. Information concerning the lease and the trucks
follows:
✓ Equal annual lease payments of $600,000 are due on January 1, 2025, and thereafter on
December 31 each year. The first payment was made on January 1, 2025.
✓ Lehigh Service estimates the fair value of the trucks to be $2,520,000. Citibank's cost of
the trucks was $2,100,000.
✓ The 10 trucks' estimated residual value is $100,000 (total) at the end of 7 years, the
estimated life of the trucks.
✓ Lehigh Service has the option to purchase the 10 trucks at the end of the lease for a total
of $580,000.
✓ Citibank's implicit interest rate is 10% (known by Lehigh Service Company).
✓ Both companies use the straight-line method for depreciation and amortization.
Required:
1) How should the lease be classified by Lehigh Service Company if the trucks' estimated
residual value is $500,000 at the end of the lease term? What would be the appropriate
journal entries on January 1, 2025, and on December 31, 2025?
2) Independent of the requirement (1) above, how should the lease be classified by Lehigh
Service Company if the trucks' estimated residual value is $850,000 at the end of the lease
term? (Hint: please evaluate whether the purchase option is considered a bargain purchase
option in this situation) What would be the appropriate journal entries on January 1, 2025,
and on December 31, 2025?
