Sylvan Inc. entered into a non-cancelable lease arrangement with Breton Leasing Corporation for a certain machine. Breton's primary business is leasing. Sylvan will lease the machine for a period of 3 years, which is 50% of the machine's economic life. Breton will take possession of the machine at the end of the initial 3-year lease and lease it to another, smaller company that does not need the most current version of the machine. Sylvan does not guarantee any residual value for the machine and will not purchase the machine at the end of the lease term. Sylvan's incremental borrowing rate is 10%, and the implicit rate in the lease is 9%. Sylvan has no way of knowing the implicit rate used by Breton. Using either rate, the present value of the lease payments is between 90% and 100% of the fair value of the machine at the date of the lease agreement. Breton is reasonably certain that Sylvan will pay all lease payments.Instructionsa.    With respect to Sylvan (the lessee), answer the following.1. What type of lease has been entered into? Explain the reason for your answer.2. How should Sylvan compute the appropriate amount to be recorded for the lease or asset acquired?3. What accounts will be created or affected by this transaction, and how will the lease or asset and other costs related to the transaction be recorded in earnings?4. What disclosures must Sylvan make regarding this leased asset?b.    With respect to Breton (the lessor), answer the following.1. What type of leasing arrangement has been entered into? Explain the reason for your answer.2. How should this lease be recorded by Breton, and how are the appropriate amounts determined?3. How should Breton determine the appropriate amount of revenue to be recognized from each lease payment?4. What disclosures must Breton make regarding this lease?

Question
Asked Jan 25, 2020
32 views

Sylvan Inc. entered into a non-cancelable lease arrangement with Breton Leasing Corporation for a certain machine. Breton's primary business is leasing. Sylvan will lease the machine for a period of 3 years, which is 50% of the machine's economic life. Breton will take possession of the machine at the end of the initial 3-year lease and lease it to another, smaller company that does not need the most current version of the machine. Sylvan does not guarantee any residual value for the machine and will not purchase the machine at the end of the lease term. Sylvan's incremental borrowing rate is 10%, and the implicit rate in the lease is 9%. Sylvan has no way of knowing the implicit rate used by Breton. Using either rate, the present value of the lease payments is between 90% and 100% of the fair value of the machine at the date of the lease agreement. Breton is reasonably certain that Sylvan will pay all lease payments.

Instructions

a.    With respect to Sylvan (the lessee), answer the following.

  • 1. What type of lease has been entered into? Explain the reason for your answer.
  • 2. How should Sylvan compute the appropriate amount to be recorded for the lease or asset acquired?
  • 3. What accounts will be created or affected by this transaction, and how will the lease or asset and other costs related to the transaction be recorded in earnings?
  • 4. What disclosures must Sylvan make regarding this leased asset?

b.    With respect to Breton (the lessor), answer the following.

  • 1. What type of leasing arrangement has been entered into? Explain the reason for your answer.
  • 2. How should this lease be recorded by Breton, and how are the appropriate amounts determined?
  • 3. How should Breton determine the appropriate amount of revenue to be recognized from each lease payment?
  • 4. What disclosures must Breton make regarding this lease?
check_circle

Expert Answer

Step 1

 

Since the student has posted multiple questions, we will answer only requirement (a). Thank You.

Requirement a:

 

Identify the type of lease and explain the reasons for such classification.

 

Lease: Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

 

Capital leases: In capital lease all the ownership risks and responsibilities are transferred from the lessor to the lessee.

 

In the given case, the lease is a capital lease.

 

Reason: Because, the present value of the lease payments are 90% of the fair market value of the leased asset.

Step 2

Requirement b:

 

Explain the way that Sylvan Inc. computes the appropriate amount to record the lease or asset acquired.

 

The leased asset should be recorded at the present value of the lease payments discounted at implicit rate of 14%. However, Sylvan Inc. does not know about this 14% implicit rate. Thus, Sylvan Inc. will record at 16% of the borrowing rate.

Step 3

 

Identify the accounts that will be credited or affected by the given lease transaction and explain the way the lease, or asset, or other cost be matched with the earnings.

 

The accounts that will be credited or affected by the given lease transaction:

 

  • “Lease Equipment”

 

  • “Capital Lease obligation”

 

  • “Interest Expense”

 

  • “Depreciation expense”

 

  • “Executor costs such as maintenance...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Accounting

Financial Accounting

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Parsons Inc. has proposed a change from one inventory accounting method to another for financial rep...

A: Accounting changes: Accounting changes can be defined as changes in accounting principles, accountin...

question_answer

Q: (Type of Lease; Amortization Schedule) Macinski Leasing Company leases a new machine to Sharrer Corp...

A: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and s...

question_answer

Q: Mathys Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants “to get e...

A: a. Classify the given following.

question_answer

Q: Classifying items on the statement of cash flows Cash flow items must be categorized into one of fou...

A: Four classifications of cash flow statement activities are: Operating, investing, financing, and non...

question_answer

Q: Explain the accounting for operating leases.

A: The accounting for an operating lease assumes that the lessor owns the leased asset, and the lessee ...

question_answer

Q: How do i adjust entries for a merchanting buisness

A: Adjusting entries are the journal entries passed at the end of the financial year to close all the t...

question_answer

Q: Maxwell Furniture Center had accounts receivable of $20,000 at the beginning of the year and $54,000...

A: Accounts receivable is increased by ($54,000-$20,000) $34,000 during the year. 

question_answer

Q: Describe techniques of percentage analysis

A: Percentage analysis: It is a method to denotes raw streams of numbers as a percentage for well under...

question_answer

Q: An entry to record Purchases and related Accounts Payableof $13,000 for merchandise purchased on Dec...

A: The given error is not recording inventory purchases in the period of purchase but in the subsequent...