Exercise 21A-13 a-d (Essay) Phelps Comany leases a building to Walsh, Inc. on Ja
ID: 2510281 • Letter: E
Question
Exercise 21A-13 a-d (Essay) Phelps Comany leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the Ph lease agreement. The lease term is 5 years, with equal annual rental payments of $4,703 at the beginning of each 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, year and the asset is not of a specialized nature. 3. The building has a fair value of $23,000, a book value to Phelps of $16,000, and a useful life of 6 4At the end of the lease term, Phelps and Walsh expect there to be an unguaranteed residual value years of $4,000 Phelps wants to earn a return of 8% on the lease, and collectibility of the payments is p This rate is known by Walsh. robable. 5. How would Phelps (lessor) and Walsh (lessee) classify this lease? How would Phelps initially measure the lease receivable, and how would Walsh initially measure the lease liability and right-of-use asset? Suppose the entire expected residual value of $4,000 is guaranteed by Walsh. How will this change your answer to part (a)? Assume the same facts as part (c), except the expected residual value is $3,000. Does your answer change? Question Attempts: Unlimited Copyright 2000-2018 by John Willey&Sons;, Inc. or related companiesExplanation / Answer
1. This lease shall be classified as operating lease as the asset is not specialised in nature nor there is any agreement between the lessor and lessee to buy the asset at the end of the lease term. Phelps company shall recognise the lease rental receivable as a normal receivable amount and Walsh shall treat this lease amount as expense in its income statement. No asset shall be recognised in the books of Walsh.
2. If the residual value is guaranteed by Walsh, then the lease shall be termed as finance lease and an asset shall be recognized in the financial statements of Walsh and not Phelps.
3. If the residual value changes there shall not be any impact
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