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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

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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