On January 1, 2014, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,345,640. Railcar 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, 2014). The boxcars have an eight-year remaining useful life, the lease contains no renewal or bargain purchase option, and possession of the boxcars reverts to the lessor at the lease’s end. The lease does not require the lessee to guarantee any residual value for the boxcars. The payment’s collectibility is reasonably certain with no important uncertainties regarding un-reimbursable costs to be incurred by the lessor. The lessor has structured the lease to earn a rate of return of 12.0%.
1. What method must Railcar Leasing Inc. use to account for the lease?
2. Prepare an amortization schedule for the lease for Railcar. (Round all amounts to the nearest cent.)
3. Prepare all journal entries for Railcar for 2014 and 2015. Assume that it reports on a calendar-year basis.
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