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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 20, Problem 1P
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

Solutions

Chapter
Section
Problem 1GI
Problem 2GI
Problem 3GI
Problem 4GI
Problem 5GI
Problem 6GI
Problem 7GI
Problem 8GI
Problem 9GI
Problem 10GI
Problem 11GI
Problem 12GI
Problem 13GI
Problem 14GI
Problem 15GI
Problem 16GI
Problem 17GI
Problem 1MC
Problem 2MC
Problem 3MC
Problem 4MC
Problem 5MC
Problem 6MC
Problem 7MC
Problem 8MC
Problem 9MC
Problem 10MC
Problem 1RE
Problem 2RE
Problem 3RE
Problem 4RE
Problem 5RE
Problem 6RE
Problem 7RE
Problem 8RE
Problem 9RE
Problem 1E
Problem 2E
Problem 3E
Problem 4E
Problem 5E
Problem 6E
Problem 7E
Problem 8E
Problem 9E
Problem 10E
Problem 11E
Problem 12E
Problem 13E
Problem 14E
Problem 15E
Problem 1P
Problem 2P
Problem 3P
Problem 4P
Problem 5P
Problem 6P
Problem 7P
Problem 8P
Problem 9P
Problem 10P
Problem 11P
Problem 12P
Problem 1C
Problem 2C
Problem 3C
Problem 4C
Problem 5C
Problem 6C
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Determining Type of Lease and Subsequent Accounting On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

  • The lease is noncancelable and has a term of 8 years.
  • The annual rentals arc $35,000, payable at the beginning of each year.
  • The interest rate implicit in the lease is 14%.
  • Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2026.
  • The cost of the equipment to the lessee is $150,000, and the fair value is approximately $185,100.
  • Ballieu incurs no material initial direct costs.
  • It is probable that Ballieu will collect the lease payments.
  • Ballieu estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of $35,000 discounted at 14% is $185,090.68 (the $1 purchase option is ignored as immaterial).

Required:

  1. 1. Next Level Identify the classification of the lease transaction from Ballice’s point of view. Give the reasons for your classification.
  2. 2. Prepare all the journal entries tor Ballieu for the years 2019 and 2020.
  3. 3. Discuss the disclosure requirements for the lease transaction in Ballice’s notes to the financial statements.

1.

To determine

Identify the type of the lease from Company B’s point of view.

Explanation

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’.

Sale type Lease: In a Sales-Type lease, the lessor sells the asset to the lessee and records a receivable. In this type of lease, the lessor records a dealer’s or manufacturer’s profit or loss depending upon the difference between the fair value of the asset and the carrying value of the asset.

Identify the type of the lease from Company B’s point of view:

CriteriaMet or notRemarks
1. Transfer of ownership at the end of leaseNo
2. Bargain purchase optionYes
3. Lease term is 75% or moreYes100%(8 years/7 years)
4

2.

To determine

Prepare the journal entries for 2019 and 2020

3.

To determine

Discuss the disclosure requirements for the lease transaction in Company B’s note to the financial statements.

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