Problem: Assume that on January 1, 2017, Lessor Corporation leased equipment wit

Question

Problem: Assume that on January 1, 2017, Lessor Corporation leased equipment with a four-year useful life to Lessee Corporation. The cost of the equipment to the lessor and its fair value are $100,000. The lease term is two years. The expected residual value is $11,000 at the end of two years and $0 at the end of four years. Lessee has the option to purchase the equipment at the end of the lease for S11,000. The implicit rate of interest in the lease payments and the Lessee's incrennental borrowing rate are 4%. The collectibility of the minimum lease payments is reasonably assured and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor under the lease. Rental payments are to be made annually and at the beginning of the year. Use straight-line depreciation on the leased asset. a. Determine the type of lease involved for both the lessor and the lessee. Lessor Lessee: b. Start with the facts summarized as at the top. If the lease term were three years, the type of lease is: Lessor: Lessee: c. Start with the facts summarized at the top. If, at lease inception, the lessee guaranteed the residual value to be $11,000 at the end of two years, determine the type of lease: Lessor Lessee: d. Start with the facts summarized at the top. If, at lease inception, a third party guaranteed the residual value to be S11,000 at the end of two years, determine the type of lease: Lessor: Lessee: e. Using the original facts only, compute the minimum rental payments that the lessor will receive. f. Using the original facts, give the entries (only those related to the lease and depreciation) for the lessor and lessee for 2017 only

Explanation / Answer

A)Operating lease for both because lease period is for only two years and all the cost relating to asset will be reimbursed by the lessor.After two years the asset will have residual value of $11000.Lease term is also of 2yeaes which is also less than 4years,the useful life of the asset.

B)Operating Lease-Same as above.

C)Operating Lease

D)Operating lease

E)

International Accounting Standard 17 (IAS 17) defines minimum lease payments as “the payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:

(a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or

(b) for a lessor, any residual value guaranteed to the lessor by:

(i) the lessee;

(ii) a party related to the lessee; or

(iii) a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee”.

So it will be $11000

F)In the books of Lessor

Cash Debit

Rental income Credit

Depreciation Debit

Equipment . Credit

In the books of lessee

Rental expenses Debit

Cash . Credit

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