BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
40 views

Various Lease Issues for Lessor and Lessee Lessee Company leases heavy equipment on January 1, 2019, from Lessor Company with the following lease provisions:

  • The lease is noncancelable and has a term of 10 years.
  • The lease does not contain a renewal or bargain purchase option.
  • The annual rentals are $27,653.77, payable at the beginning of each year.
  • Lessee agrees to pay all executory costs directly to a third party.
  • The interest rate implicit in the lease is 12%, which is known by Lessee.
  • The residual value of the property at the end of 10 years is estimated to be zero.
  • The cost of the equipment to the lessor is $175,000. The fair value is 190,000.
  • The lessor incurs no material initial direct costs.
  • The lessor expects to collect all lease payments.
  • Lessee’s incremental borrowing rate is 15%, and it uses the straight-line method to record depreciation on similar equipment.
  • On December 1, 2019, the lessee pays insurance of $1,900, property taxes of $1,300, and maintenance of $600.
  • On December 1, 2020, the lessee pays insurance of $1,800, property taxes of $1,200, and maintenance of $500.

Required:

  1. 1. Next Level Identify the type of lease involved for the lessee and the lessor, and give reasons for your classifications.
  2. 2. Prepare all the journal entries for both the lessee and the lessor for 2019 and 2020.

1.

To determine

Identify the type of lease involved for lessee and lessor and provide the reasons for such classification.

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’.

Finance leases: In finance lease all the ownership risks and responsibilities are transferred from the lessor to the 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 lease involved for lessee and lessor:

CriteriaMet or notRemarks
1.Transfer of ownership at the end of leaseNo 
2.Bargain purchase optionNo 
3.Lease term is for major part of its economic lifeNot Known 
4.Present value of lease payments is substantially all of the fair valueYes

92%

($175,000/$190,000)

5. Specializes nature of the asset  
Additional criteria (For lessor) 
1

2.

To determine

Prepare the journal entries in the books of lessee and lessor for the years 2019 and 2020.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

What is multilevel security?

Accounting Information Systems

List and describe the three functions of money.

Brief Principles of Macroeconomics (MindTap Course List)

What is inflation and what causes it?

Principles of Microeconomics (MindTap Course List)

Explain the four types of corporate cultures.

Foundations of Business (MindTap Course List)

EFFECTIVE INTEREST RATE You borrow 85,000; the annual loan payments are 8,273.59 for 30 years. What interest ra...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Temporary accounts are closed at the end of each accounting period.

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)