Intermediate Accounting
3rd Edition
ISBN: 9780136912644
Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella
Publisher: Pearson Education (US)
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Chapter 18, Problem 2JC
Judgment Case 2: Lease Classification
On January 1, 2019, Lessee Company leased a piece of machinery from Lessor Bank. The machinery could also be used by other parties. The 14-year lease requires payments of $250,000 due at the beginning of each year. The lease agreement does not transfer ownership of the machinery nor does it contain a purchase option. Lessor Bank anticipates that the asset will have a residual value at the end of the lease term, but this value is not guaranteed by Lessee or a third party. The machinery has a fair value of $2,628,000 and an estimated life of 19 years. Lessor Bank's implicit rate is 7% and is known by Lessee Company.
Do you think Lessee should classify this as an operating lease or a finance lease? Explain your answer.
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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.
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 elect to expense leases of a short-term nature as a practical expedient. Prepare the
journal entry for January 1, 2019. Indicate a debit as positive and a credit as negative. Type 0 for any blanks
that do not apply.
The following facts pertain to a non-cancelable lease agreement between Cullumber Leasing Company and Crane Company, a lessee.
Commencement date
Annual lease payment due at the beginning of
each year, beginning with January 1, 2025
Residual value of equipment at end of lease term,
guaranteed by the lessee
Expected residual value of equipment at end of lease term
Lease term
Economic life of leased equipment
Fair value of asset at January 1, 2025
Lessor's implicit rate
Lessee's incremental borrowing rate
Date
1/1/25
1/1/25
1/1/26
1/1/27
1/1/28
1/1/29
1/1/30
12/31/30
Lease payment
(A)
$97,312
$97,312
$97,312
$97,312
$97,312
$97,312
$5,000
January 1, 2025
$97,312
$24,806
$20,456
$15,845
$10,957
$5,775
$283
$55,000
$50,000
6
6
The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment.
Table shows the amortization schedule for lessee for the lease term:
$546,000
years
years
6 %
Interest expense
(B = Prev D* 6%)…
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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