You Tell Me, Am I a Lease? Auto Inc. (Auto) is a company based in New York that manufactures automobiles and exports the

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You Tell Me, Am I a Lease?
Auto Inc. (Auto) is a company based in New York that
manufactures automobiles and exports the finished vehicles to
Europe. Auto manufactures two models; the most popular model is a
four-door sedan (Sedan), and the other is a less common, highly
customizable luxury sports car (Luxury Car). Auto contracts
Trans-Atlantic Inc. (Atlantic) to ship its products to Europe.
Atlantic has a fleet of 10 multi-use shipping vessels, each with
capacity for 2,000 vehicles.
The terms of the shipping contracts are as follows:
Sedan contract terms: • The term is five years. • MV Manhattan,
a ship in Atlantic’s fleet, is dedicated to shipping Auto’s Sedans
for the term of the contract. • Auto determines (1) which European
ports receive shipments and (2) the order in which deliveries are
made to the ports, Auto instructs Atlantic accordingly. • Auto has
the option to send the ship below capacity. If the ship is below
capacity, Atlantic cannot use the excess capacity to ship products
of its other customers.
Luxury Car contract terms: • The term is five years. • Atlantic
is required to deliver shipments of Luxury Cars within five weeks
of notification from Auto that an order of Luxury Cars is ready for
shipping. • Auto may provide 250 to 2,000 Luxury Cars in a single
request; however, shipping requests of Luxury Car generally do not
exceed 500 vehicles in a single request because of the lower
production volume and longer manufacturing time of Luxury Car. •
Atlantic has the option to use excess capacity to ship products of
its other customers. • After notification from Auto that Luxury
Cars are ready to ship, Atlantic determines when within the five
week period to ship the cars, as well as the shipping route.
Auto’s CFO understands that the new leasing standard has certain
provisions that may affect how the company treats contracts of this
nature.
Required:
Analyze this information to determine how to account for each
contract in accordance with the new leasing standard.
Sample journal entries for each contract, which you
should refer to in your letter.
Please provide journal entries for Sedan contract
and journal entries for Luxury car contract separately.