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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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Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides for it to lease computers from Appleton Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

  1. 1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. The computers are not specialized for Sax.
  2. 2. The computers have an estimated life of 5 years, a fair value of $300,000, and a zero estimated residual value.
  3. 3. Sax agrees to pay all executory costs directly to a third party.
  4. 4. The lease contains no renewal or bargain purchase options.
  5. 5. The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate. Sax’s incremental borrowing rate is 10%.
  6. 6. Sax uses the straight-line method to record depreciation on similar equipment.

Required:

  1. 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax.
  2. 2. Calculate the amount of the asset and liability of Sax at the inception of the lease (round to the nearest dollar).
  3. 3. Prepare a table summarizing the lease payments and interest expense.
  4. 4. Prepare journal entries for Sax for the years 2019 and 2020.

1.

To determine

Identify the type of lease for Company S.

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’.

Identify the type of lease for Company S:

CriteriaMet or notRemarks
1...

2.

To determine

Compute the amount of the asset and liability of Company S at the inception of the lease.

3.

To determine

Prepare a table of summary for the lease payment and interest expense.

4.

To determine

Prepare the journal entries for Company S for the year 2019 and 2020.

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