P15-4A Bfne sheet at P15-SA Presented below are three different lease transactio

Question

P15-4A

Bfne sheet at P15-SA Presented below are three different lease transactions that occurred for Riggiero in 2017. Assume that all lease contracts start on January 1,2017. In no case does Ragu iero receive title to the properties leased during or at the end of the lease term Lessor Judson Delivery Computer s 5,000 6 years years $27,500 Hester Co. Gunselman Auto Type of property Yearly rental Lease term Estimated economic life Fair value of lease asset Present value of the lease Delivery equipment Automobile S 4,200 4 years 7 years $19,000 5 3,700 2 years 5 years $11,000 rental payments Bargain purchase option $26,000 None $13,000 None S 6,400 None Instructions a) Which of the leases are operating leases and which are capital leases? Explain. (b) How should the lease transaction for Hester Co. be recorded in 2017 (c) How should the lease transaction for Judson Delivery be recorded on January 1, 2017?

Explanation / Answer

A lessee (the company leasing equipment) should classify a lease transaction as a capital lease if it is non-cancelable and if one or more of the four classification criteria are met:

The agreement specifies that ownership of the asset transfers to the lessee.
The agreement contains a bargain purchase option.
The non-cancelable lease term is equal to 75% or more of the expected economic life of the asset.
The present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset.
If none of these criteria are met, the lease can be classified as an operating lease.

(a) Ruggerio Inc. Inc. should record the Judson Delivery lease as a capital lease because: (1) the lease term is greater than 75% of the estimated economic life of the leased property and (2) the present value of the lease payments is 90% or more of the fair market value of the computer. It should be noted that only one condition needs to be met to require capitalization.

Both the Hester Co. and Gunsleman Auto leases should be reported as operating leases because none of the four conditions is met to require treatment as a capital lease.

(b) The Hestor Co. lease is an operating lease. The entry to record the lease payment in 2017 therefore is as follows:

Rent Expense...........................................Debit................................................ 4,200

Cash............................................................Credit.................................. 4,200

(c) The Judson Delivery lease is a capital lease. The entry to record the capital lease on January 1, 2017 therefore is as follows:

Leased Asset—Computer............................................debit............................ 26,000

Lease Liability............................................................credit.................... 26,000

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