Jacobsen Leasing Company leases a new machine that has a cost and fair value of
ID: 2360786 • Letter: J
Question
Jacobsen Leasing Company leases a new machine that has a cost and fair value of $71,000 to Stadler Corporation on a 3-year noncancelable contract. Stadler Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2013. Jacobsen Leasing Company expects to earn a 7% return on its investment. The annual rentals are payable on each December 31. Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) a.Discuss the nature of the lease arrangement and the accounting method that each party to the lease should apply b.Prepare an amoritzation schedule that would be suitable for both the lessor and lessee and that covers all the years inmvolved.Explanation / Answer
(a) Because the lease term is longer than 75% of the economic life of the asset and the present value of the minimum lease payments is more than 90% of the fair value of the asset, it is a capital lease to the lessee. Assuming Collectibility of the rents is reasonably assured and no important uncertainties surround the amount of un-reimbursable costs yet to be incurred by the lessor, the lease is a direct financing lease to the lessor.
The lessee should adopt the capital lease method and record the leased asset and lease liability at the present value of the minimum lease payments using the lessee
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