Chapter 21 Salaur Company is evaluating a lease arrangement being offered by TSP

Question

Chapter 21 Salaur Company is evaluating a lease arrangement being offered by TSP Company for use of a computer system. The lease is noncancelable, and in no case does Salaur receive title to the computers during or at the end of the lease term. The lease starts on January 1, 2011, with the first rental due at the beginning of the year. Additional information related to the lease is as follows: Yearly rental $3,557.25 Lease term 3 years Estimated economic life 5 years Purchase option $3,000 at end of 3 years, which approximates fair value Renewal option 1 year at $1,500; no penalty for nonrenewal; standard renewal clause Fair value at inception of lease $10,000 Cost of asset to lessor $10,000 Residual value Guaranteed 0 Unguaranteed $3,000 Incremental borrowing rate of lessee 12% Lessors implicit rate Executory costs paid by: Lessor; estimated to be $500 per year Estimated fair value at end of lesse $3,000 Accounting Analyze the lease capitalization criteria for this lease for Salaur Company. Prepare the journal entry for Salaur on January 1, 2011. Analysis Briefly discuss the impact of the accounting for this lease for two common ratios: return on assets and debt to total assets. Principles What element of the reliability (representational faithfulness, verifiability, neutrality) is being addressed when a company like Salaur evaluates lease capitalization criteria?

Explanation / Answer

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