Concept explainers
Lessor’s initial direct costs; operating and sales-type leases
• LO15–2, LO15–3, LO15–4, LO15–7
Terms of a lease agreement and related facts were:
a. The lease asset had a retail cash selling price of $100,000. Its useful life was six years with no residual value (straight-line depreciation).
b. Annual lease payments at the beginning of each year were $20,873, beginning January 1.
c. Lessor’s implicit rate when calculating annual rental payments was 10%.
d. Costs of $2,062 for legal fees for the lease execution were the responsibility of the lessor.
Required:
Prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions:
1. The lease term is three years and the lessor paid $100,000 to acquire the asset (operating lease).
2. The lease term is six years and the lessor paid $100,000 to acquire the asset. Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 9%.
3. The lease term is six years and the lessor paid $85,000 to acquire the asset.
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Intermediate Accounting, 10 Ed
- John Limited leses an asset from Smith Limited. The lease agreement has the following terms: lease term is 3 years estimated economic life of the leased asset is 6 years 3 x annual rental payments of $24 000 each payment is one year in arrears İncluded in the amount of annual rental payments is an amount of $1 000 to cover repairs and maintenance of the leased asset residual value at the end of the lease term is not guaranteed by the lessee John Ltd incurs initial direct costs of $500 interest rate implicit in the lease is 7% At the commencement of the lease, the amount of lease liability would be measured as: Group of answer choices $60 359. $62 983 $60 859 $64 584arrow_forwardt34 Initial direct costs incurred by the lessor in an operating lease should beA. expensed in the year of incurrence by including them in the cost of goods sold or by treating them as a sellingexpense.B. deferred and recognized as reduction in the interest rate implicit in the lease.C. capitalized as part of asset cost and depreciated over the lease term.D. deferred and carried on the statement of financial position until the end of the lease term.arrow_forwardProblem 3. Direct Financing Lease with Residual Value On January 1, 20x1, ABC Financing Co leased equipment to XYZ, Inc. Information on the lease is shown below: Cost of Equipment P330, 647 5 years Useful Life of Equi pment Lease Term 4 years Annual Rent Payable at the end of each year 100,000 Interest Rate Implicit in the lease 10% Residual Value 20,000 The equipment will revert back to АВС at the end of the lease term. The lease is classified as direct financing lease. Requirements: Compute for the following assuming the residual value is (1) guar anteed and (2) unguaranteed a. Gross Investment in the lease on January 1, 20x1 Net Investment in the lease on January 1, 20x1 Unearned Interest income on January 1, 20x1 b. c. d. Prepare the journal entries on January 1, 20x1 and December 31, 20х1 е. Prepare the journal entry on December 31, 20x4 if the fair value of the residual value i. P20,000 ii. P5,000arrow_forward
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