Salaur Company, a risky start-up, is evaluating a lease arrangement being offered by TSP Company for use of a standard computer system. The lease is non-cancelable, and in no case does Salaur receive title to the computers during or at the end of the lease term. TSP will lease the returned computers to other customers. The lease starts on January 1, 2020, with the first rental payment due on January 1, 2020. Additional information related to the lease and the underlying leased asset is as follows. Yearly rental $3,057.25 Lease term 3 years Estimated economic life 5 years Purchase option $3,000 at end of 3 years, which approximates fair value Renewal option 1 year at $1,500; no penalty for nonrenewal; standard renewal clause Fair value at commencement $10,000 Cost of asset to lessor $8,000 Residual value: Guaranteed –0– Unguaranteed $3,000 Lessor’s implicit rate (known by the lessee) 12% Estimated fair value at end of lease $3,000 Briefly discuss the impact of the accounting for this lease as a finance or operating lease for two common ratios: return on assets and debt to total assets. Type your answer here eTextbook and Media What fundamental quality of useful information is being addressed when a company like Salaur capitalizes all leases with terms of one year or longer?
Salaur Company, a risky start-up, is evaluating a lease arrangement being offered by TSP Company for use of a standard computer system. The lease is non-cancelable, and in no case does Salaur receive title to the computers during or at the end of the lease term. TSP will lease the returned computers to other customers. The lease starts on January 1, 2020, with the first rental payment due on January 1, 2020. Additional information related to the lease and the underlying leased asset is as follows. Yearly rental $3,057.25 Lease term 3 years Estimated economic life 5 years Purchase option $3,000 at end of 3 years, which approximates fair value Renewal option 1 year at $1,500; no penalty for nonrenewal; standard renewal clause Fair value at commencement $10,000 Cost of asset to lessor $8,000 Residual value: Guaranteed –0– Unguaranteed $3,000 Lessor’s implicit rate (known by the lessee) 12% Estimated fair value at end of lease $3,000 Briefly discuss the impact of the accounting for this lease as a finance or operating lease for two common ratios: return on assets and debt to total assets. Type your answer here eTextbook and Media What fundamental quality of useful information is being addressed when a company like Salaur capitalizes all leases with terms of one year or longer?
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter19: Lease Financing
Section: Chapter Questions
Problem 8MC: Lewis’s management has been considering moving to a new downtown location, and they are concerned...
Related questions
Question
Salaur Company, a risky start-up, is evaluating a lease arrangement being offered by TSP Company for use of a standard computer system. The lease is non-cancelable, and in no case does Salaur receive title to the computers during or at the end of the lease term. TSP will lease the returned computers to other customers. The lease starts on January 1, 2020, with the first rental payment due on January 1, 2020. Additional information related to the lease and the underlying leased asset is as follows.
Yearly rental | $3,057.25 | ||
Lease term | 3 years | ||
Estimated economic life | 5 years | ||
Purchase option | $3,000 at end of 3 years, which approximates fair value | ||
Renewal option | 1 year at $1,500; no penalty for nonrenewal; standard renewal clause | ||
Fair value at commencement | $10,000 | ||
Cost of asset to lessor | $8,000 | ||
Residual value: | |||
Guaranteed | –0– | ||
Unguaranteed | $3,000 | ||
Lessor’s implicit rate (known by the lessee) | 12% | ||
Estimated fair value at end of lease | $3,000 |
Briefly discuss the impact of the accounting for this lease as a finance or operating lease for two common ratios: return on assets and debt to total assets.
Type your answer here
Type your answer here
eTextbook and Media
What fundamental quality of useful information is being addressed when a company like Salaur capitalizes all leases with terms of one year or longer?
Type your answer here
Type your answer here
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning