Synergetics Inc. leased a new crane to M. K. Gumowski Construction under a 5-yea
ID: 2486338 • Letter: S
Question
Synergetics Inc. leased a new crane to M. K. Gumowski Construction under a 5-year noncancelable contract starting January 1, 2008. Terms of the lease require payments of $22,000 each January 1, starting January 1, 2008. Synergetics will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of $160,000, and a cost to Synergetics of $160,000. The estimated fair value of the crane is expected to be $45,000 at the end of the lease term. No bargain purchase or renewal options are included in the contract. Both Synergetics and Gumowski adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Gumowski's incremental borrowing rate is 10%, and Synergetics' implicit interest rate of 9% is known to Gumowski. Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor. Prepare all the entries related to the lease contract and leased asset for the year 2008 for the lessee and lessor, assuming the following amounts. Insurance $500. Taxes $2,000. Maintenance $650. Straight-line depreciation and salvage value $10,000. Discuss what should be presented in the balance sheet, the income statement, and the related notes of both the lessee and the lessor at December 31, 2008.Explanation / Answer
There are two type of lease financial and operating.
A lease is a finance lease if it transfers substantially transfers all the risks and rewards incident to ownership
A lease is an operating lease if it does not transfer substantially all the risks and rewards incident to ownership.
This is an operating lease as Synergetics has not transferred all the risk and rewards to Gimowski. Synergetics is paying Insurance, taxes and maintenence for the asset. That means the right is still vested in its hand.
So, the financed assets remain on the lessor’s balance sheet and the lease payments should be recognised in the income statement.
For lessor Rental expense is recognised on a straight line basisin the economic outturn account over the lease term.Cut-off:Accrue if service rendered but invoice not received at year-end and Defer if invoice received in advance of the service (to be rendered in the next accounting period)
b) In the books of Lessor
1 Jan Cash a/c Dr 22000
To Unearned rent 22000
(Being rent received in advance)
31 Dec2008 Unearned rent a/c Dr 22000
Rental Income 22000
31Dec Depreciation a/c Dr (160000-10000)/5 30000
Accumulated Depreciation
(Being depreciation charged on the SLM)
31 Dec Insurance a/c Dr 500
Taxes a/c Dr 2000
Maintenance a/c Dr 650
Cash a/c 3150
(Being Payment done by lessor )
In the books of Lesse:
Jan 1 Prepaid rent a/c Dr 22000
To Cash 22000
(Being cash paid for the lease rental in advance)
31 Dec Rent expense a/c Dr 22000
Prepaid Rent 22000
(Being entry booked at the end of the year)
c) In Lessor:
Income Statement= Rental Income, expenses related to lease
Balnace Sheet= Leased assets less accumulated depreciation
Leased assets should be presented in the balance sheet of the lessor according to the nature of the asset. Lease income should be recognised over the lease term on a straight-line basis,
In Lessee books"
Income Statement= Rental expense
Disclousres: The total of future MLPs under non-cancelable operating leases for each of the following periods: no later than 1 year; later than 1 year and not later than 5 years; and later than 5 years and 2) A general description of the lessee’s significant leasing arrangements
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