Orion leased a computer to the Lenox Silver Company on January 1, 2014, under th

Question

Orion leased a computer to the Lenox Silver Company on January 1, 2014, under these terms:

1. Lease term (fixed and noncancelable) …………………… 3 years

2. Estimated economic life of the equipment ………………..5 years

3. Fair market value at lease inception ……………………... $5,000

4. Lessor’s cost of asset ……………………………………... $5,000

5. Bargain purchase offer ………………………………….….. None

6. Transfer of title …………………………………………………. No

7. Guaranteed residual value by lessee (excess to lessee)

January 1, 2014 ……………………………………………….. $2,000

8. Lessee’s normal depreciation method……………....Straight Line

9. Lessee’s incremental borrowing rate ………………………... 11%

10. Executory costs …………………………………………..… None

11. Initial indirect costs ……………………………………..…. None

12. Collectibility of rental payment ………………………… Assured

13. Performance by lessor …………………………………. Complete

14. Annual rental (1st payment, January 1, 2014) ……….... $1,620

15. Lessor’s implicit interest rate ……………………………… None

Required:

1.Determine what type of lease this is for the lessee.

2.Determine what type of lease this is for the lessor.

3.Provide entries for the lessee and the lessor from January 1, 2014, through January 1, 2015.

4.Provide entries for the lessee and the lessor if the asset is disposed of for $2,100 by the lessee on January 1, 2014. Assume interest has been accrued on December 31.

Explanation / Answer

1. Types of lease this is for lessee

A.Operating Lease:An operating lease is basically a rental agreement. The lessee records rent expense for each of the lease payments.

B.Finance Lease:

A capital lease is a rental agreement in form, but the substance of the transaction is an asset purchase. With capital leases, the lessee records and asset and related liability rather than rental expense. The lessee also record depreciation on the asset. If a lease agreement meets any one of the following criteria, it is considered to be a capital lease:

2.Types of lease this is for the lessor.

A lessor (the leasing company) can account for a lease in three ways:

Lease capitalization, which includes the direct-financing lease and the sales-type lease, needs to be recognized when a lease meets any one of the four criteria specified for capitalization of leases

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.