Intermediate Accounting
3rd Edition
ISBN: 9780136912644
Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella
Publisher: Pearson Education (US)
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Textbook Question
Chapter 18, Problem 18.22E
Classification as Finance or Operating Lease. Lessee. Lessor,
- The lease carries a term of 5 years There is no renewal option and there is no transfer of ownership.
- The rental payments of $120,000 per year are due each January 1 with the first payment due at lease commencement.
- The fair value of the equipment on the date the lease is signed is $650,000 The equipment has an economic life of 8 years The lessor paid fair value to acquire the asset On January 1, 2019, the carrying value is $650,000.
- There is a guaranteed residual value of $100,000 provided by a third party This guaranteed residual value is equal to the expected residual value so that there is no unguaranteed residual asset expected at the end of the lease term.
- Plash Photo depreciates similar machinery that it owns on a straight-line basis.
- The lessee pays initial direct costs of $10,000 at the lease commencement date.
- Plash Photo's incremental borrowing rate is 10% per year Plash does not know the lessor s implicit rate.
- The lessor is reasonably certain regarding the collection of the lease payments, and it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.
Required
- a. Classify the lease for both the lessor and the lessee Find the lessor's implicit rate.
- b. Prepare the journal entries for Plash Photo (the lessee) for the first year of the lease (i.e., January 1 and December 31).
- c. Prepare the journal entries for the lessor for the first year of the lease (i.e., January 1 and December 31).
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Students have asked these similar questions
The details of the equipment lease agreement that Taj Corp. (lessee) recently entered into with Stanger
Leasing (lessor) are:
Commencement date: January 1, 2019.
■ Term of lease: 12 months.
Payments: $1,000 per month first due at the commencement date.
Other: Title does not transfer and the lease does not include any renewal or purchase options.
Interest rate implicit in the lease: Lessee not able to readily determine.
Incremental borrowing rate: 9% per annum (0.75% per month).
Estimated useful life of equipment: 8 years.
Depreciation method: Straight-line.
Year end: December 31.
Assume that Taj Corp. does not elect to expense leases of a short-term nature.
Prepare the journal entry for January 31, 2019.
Three different lease transactions are presented below for Crane Enterprises. Assume that all lease transactions start on January 1,
2024. Crane does not receive title to the properties, either during the lease term or at the end of it. The yearly rental for each of the
leases is paid at the beginning of each year. Crane Enterprises prepares its financial statements using ASPE.
Lease termi
Estimated economic life
Yearly rental payment
Fair market value of leased asset
Present value of lease rental payments
Interest rate
Manufacturing
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5 years
15 years
$12,300
$86,400
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On January 1, 2019, AA Company leased a plastic molding machine from BB Company. Additional information regarding the lease agreement follows:
Lease term
4 years
Annual rental payment, in advance
66,500
Residual value at the end of the lease term
15,000
Residual value guaranteed by AA
0
Implicit rate
8%
Expected useful life of the machine
6 years
AA intends to return the machine to BB at the end of the lease. The annual rental payment includes P1,500 to cover the costs of maintenance and insurance. AA Company, likewise paid P8,000 to its broker for securing the lease.
(Use two decimal places for present value factor in answer the following questions)
- What is the balance of the lease liability at January 1, 2019?
- What is the interest expense to be reported by AA in 2019?
- What is the balance of the lease liability at December 31, 2019?
- What is the depreciation expense reported in 2019?
- What is the carrying value of the leased asset at December 31, 2019?
Please provide solutions
Chapter 18 Solutions
Intermediate Accounting
Ch. 18 - Does the lessee become the owner of the equipment...Ch. 18 - Prob. 18.2QCh. 18 - Prob. 18.3QCh. 18 - What are typical terms and provisions in a lease...Ch. 18 - How does a lease offer business and financial...Ch. 18 - Prob. 18.6QCh. 18 - How is the right-of-use asset measured?Ch. 18 - What components are included in a lease contract?Ch. 18 - How does a lessee separate lease and nonlease...Ch. 18 - How does a lessor separate lease and nonlease...
Ch. 18 - Does a lessee have an option not to separate lease...Ch. 18 - What are the criteria for a lessee to report a...Ch. 18 - Prob. 18.13QCh. 18 - Can the lessor account for a lease either as an...Ch. 18 - What is the difference in the lessees lease...Ch. 18 - How does a guaranteed residual value affect the...Ch. 18 - Prob. 18.17QCh. 18 - What discount rate does the lessee use to...Ch. 18 - Does the choice of discount rate (i.e., the lessee...Ch. 18 - Prob. 18.20QCh. 18 - Prob. 18.21QCh. 18 - Prob. 18.22QCh. 18 - How does a lessee measure the lease liability?Ch. 18 - What is the lessees short-term lease policy...Ch. 18 - Prob. 18.25QCh. 18 - What are the lessee s accounting and reporting...Ch. 18 - Prob. 18.27QCh. 18 - Prob. 18.28QCh. 18 - Prob. 18.29QCh. 18 - How does the lessor measure the net investment in...Ch. 18 - Prob. 18.31QCh. 18 - Prob. 18.32QCh. 18 - Prob. 18.33QCh. 18 - Baxter Brothers, Inc. enters into a four-year...Ch. 18 - Zhou Systems signed a 5-year lease at the...Ch. 18 - Insight Corporation leases equipment for 5 years...Ch. 18 - Lowe Leasing Company recently leased machinery to...Ch. 18 - Prob. 18.5MCCh. 18 - Prob. 18.6MCCh. 18 - Prob. 18.7MCCh. 18 - Bischoff Enterprises leases office space from...Ch. 18 - Identifying Lease and Nonlease Components. Deane...Ch. 18 - Prob. 18.2BECh. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as a Finance or Operating Lease,...Ch. 18 - Prob. 18.7BECh. 18 - Prob. 18.8BECh. 18 - Prob. 18.9BECh. 18 - Classification of Lease, Lessor, IFRS. Repeat the...Ch. 18 - Prob. 18.11BECh. 18 - Finance Lease, Lessee, Lessor, Guaranteed Residual...Ch. 18 - Finance Lease, Lessee, Lessor, Unguaranteed...Ch. 18 - Composition of Lease Payments, Variable Payments....Ch. 18 - Composition of Lease Payments. Variable Payments....Ch. 18 - Determining the Implicit Rate In the Lease. Assume...Ch. 18 - Prob. 18.17BECh. 18 - Prob. 18.18BECh. 18 - Prob. 18.1ECh. 18 - Allocation of Total Payments to Lease and Nonlease...Ch. 18 - Operating Lease, Nonlease Components, Lessee....Ch. 18 - Operating Lease, Rate or Index, Effect of Variable...Ch. 18 - Prob. 18.5ECh. 18 - Prob. 18.6ECh. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Prob. 18.9ECh. 18 - Prob. 18.10ECh. 18 - Prob. 18.11ECh. 18 - Prob. 18.12ECh. 18 - Prob. 18.13ECh. 18 - Finance Lease, Purchase Option, Lessee,...Ch. 18 - Prob. 18.15ECh. 18 - Prob. 18.16ECh. 18 - Prob. 18.17ECh. 18 - Operating Lease, Lessor. True Image Copier Company...Ch. 18 - Operating Lease, Lessee, Amortization Schedules,...Ch. 18 - Prob. 18.20ECh. 18 - Prob. 18.21ECh. 18 - Classification as Finance or Operating Lease....Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance, Sales-Type, or...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Prob. 18.8PCh. 18 - Prob. 18.9PCh. 18 - Prob. 18.10PCh. 18 - Prob. 18.11PCh. 18 - Direct Financing Lease, Deferred Selling Profit,...Ch. 18 - Cases Judgment Cases Judgment Case 1: Comparison...Ch. 18 - Judgment Case 2: Lease Classification On January...Ch. 18 - Prob. 1FSCCh. 18 - Prob. 2FSCCh. 18 - Surfing the Standards Case 1: Lease Contracts...Ch. 18 - Prob. 2SSCCh. 18 - Prob. 3SSCCh. 18 - Basis for Conclusions Case 1: Operating Lease...Ch. 18 - Prob. 2BCCCh. 18 - Basis for Conclusions Case 3: Lease Classification...
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