On January 1, Lessor Company leases equipment to Lessee Company. The lease term is 8 years; the economic life of the asset is 12 years. The cost of the equipment is $36,000; its fair value is $61,000. Lessor’s implicit rate is 7%; Lessee’s incremental borrowing rate is 7%. Lease payments of $9000 are due at the beginning of each year (PV $57,510). At the end of the lease term, the asset is expected to have a residual value of $6000 (PV $3492), none of which is guaranteed by Lessee. Which of the following is true at the inception of the lease?The ROU asset is recorded if the lease is a finance lease but not if it is an operating lease.The ROU asset is recorded if the lease is an operating lease but not if it is a finance lease.Lessor considers the unguaranteed residual value as a source for recovering its investment when computing the periodic lease payments.Lessee would add in the present value of the residual value if guaranteeing it for the full $6000 when recording the ROU asset.

ROU Asset is recorded in the books of the lessee. Lessor records net investment in the books and…

Answered: On January 1, Lessor Company leases…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 6E: Lessor Accounting Issues Ramsey Company leases heavy equipment to Terrell Inc. on March 1, 2019, on...

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On January 1, Lessor Company leases equipment to Lessee Company. The lease term is 8 years; the economic life of the asset is 12 years. The cost of the equipment is $36,000; its fair value is $61,000. Lessor’s implicit rate is 7%; Lessee’s incremental borrowing rate is 7%. Lease payments of $9000 are due at the beginning of each year (PV $57,510). At the end of the lease term, the asset is expected to have a residual value of $6000 (PV $3492), none of which is guaranteed by Lessee.

Which of the following is true at the inception of the lease?
1. The ROU asset is recorded if the lease is a finance lease but not if it is an operating lease.
2. The ROU asset is recorded if the lease is an operating lease but not if it is a finance lease.
3. Lessor considers the unguaranteed residual value as a source for recovering its investment when computing the periodic lease payments.
4. Lessee would add in the present value of the residual value if guaranteeing it for the full $6000 when recording the ROU asset.

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