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Question - Wolverine Sales and Service entered into a lease agreement to lease a fleet of five vehicles from Boilermaker Motors. The term of the lease is five years and Wolverine makes annual payments of $20,000 per year beginning on January 1, 2017 (and then every December 31 through December 31, 2020). January 1, 2017 is also the lease commencement date. Wolverine does not guarantee any residual value in the lease agreement. Wolverine received $7,500 on 1/1/17 as an incentive to sign the lease agreement and incurred initial direct costs in 2016 of $2,000 related to the lease that were recorded as prepaid assets. The estimated economic life of the vehicles is ten years and their fair value at lease inception is $175,000. Wolverine is unaware of Boilermaker's implicit rate, but Wolverine's incremental borrowing rate is 5% per year. There is no transfer of ownership at the end of the lease, nor is there a purchase option. The vehicles are not of a specialized nature.
Required:
1. What type of lease has Wolverine signed? Explain in terms of the new US GAAP standard.
2. Prepare the 2017 journal entries for Wolverine.
3. Prepare the 2018 journal entry(ies) for Wolverine.
4. Prepare the 2021 journal entries for Wolverine.
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