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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Sales-Type Lease with Receipts at End of Year Lamplighter Company, the lessor, agrees to lease equipment to Tilson Company, the lessee, beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

  • The lease is noncancelable and has a term of 8 years.
  • The annual rentals are $32,000, payable at the end of each year.
  • Tilson agrees to pay all executory costs directly to a third party.
  • The interest rate implicit in the lease is 14%.
  • The cost of the equipment to the lamplighter is $110,000. The fair value of the equipment is $155,000.
  • Lamplighter incurs no material initial direct costs.
  • Lamplighter expects to collect all lease payments.
  • Lamplighter estimates that the fair value at the end of the lease term will be $20,000 and that the economic life of the equipment is 9 years. This value is not guaranteed by the Tilson.

Required:

  1. 1. Calculate the selling price implied by the lease.
  2. 2. Next Level State why this is a sales-type lease.
  3. 3. Prepare a table summarizing the lease receipts and interest income earned by the lessor for this sales-type lease.
  4. 4. Prepare an accretion schedule for the unguaranteed residual asset.
  5. 5. Prepare journal entries for lamplighter for the years 2019, 2020, and 2021.
  6. 6. Next Level Prepare partial balance sheets for lamplighter for December 31, 2019, and December 31, 2020, showing how the accounts should be disclosed. Use the change in present value approach to classify the lease receivable as current and noncurrent.

1.

To determine

Calculate the selling price as implied in the lease.

Explanation

Sales-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 assets and the carrying value of the asset.

Calculate the selling price as implied in the lease:

Selling Price= $32,000×

2.

To determine

Explain the reasons for classifying the lease as a sale-type lease

3.

To determine

Prepare a table summarizing the lease receipts and interest revenue earned by the lessor Company L for the sales-type lease

4.

To determine

Prepare an accretion schedule for the unguaranteed residual asset.

5.

To determine

Prepare the journal entries for Company L, the lessor for the years 2019, 2020 and 2021.

4.

To determine

Prepare partial balance sheets for Company L for December 31, 2019 and December 31, 2020 showing the lease accounts reported on it.

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