Communication Case 15-2 Classification issues; leee accounting: group interactio
ID: 2570005 • Letter: C
Question
Communication Case 15-2 Classification issues; leee accounting: group interaction LO15-1 ·LO15-2 @ , LOI5-3, LO15-6g. LO15-7 tetettate Automobiles Corporation leased 40 vans to VIP Tansport under a four-year noacancelable lease ca January 1, 2013. Information concert-Sthe lease and te va·follett: Equal anmual lease payments of $300,000 are duc on January 1, 2018, and thercafter on December 31 cach year. The first payment was made January 1, 2018Interstate's implicit interest ratc is10% and known by VIP b VIP has the option to purchase all of the vans at the end of the lease for a total of $290,000. The vans estimated residual value is $300,000 at the end of the lease term and $50,000 at the end of 7 years, the estimated life of cach van. c. VIP estimates the fair value of the vans to be $1,240,000. Interstate's cost was $1,050,000 VIPsinsemeoial booing re 9 VIP will pay the maintenance fees not included in the annaal lease payments of $1,000 per year. The depreciation method is straight-linc. Your inseructor will divide the class ino to to six groups depending on the size of the class The missicn of your group is to assess the proper recoeding and reporing of the lease described. Required 1. Each group member should deliberate the situation independently and draft a tentative argument prior to the class session for which the case is assigned 2 In class, cach group will meet for 10 to 15 minutes in different areas of the classroom. During that meeting, group members will take turna sharing their suggestions for the purpose of arriving a single group treatment 3. After the allotted time, a spokesperson for cach group (selected during the group meetinga) will share the group's solution with the class. The goal of the class is to incorporate the views of cach group into a consensus approach to the situation. Specifically you should address Identify potential advantages to VIP of leasing the vans rather than purchasing them. Regardless of your response to previous reg urements sup pose VIP recorded the lease on January 1, 2 How should the lease be classified by VIP? by Interstate? 18 as aan e ease in the announ of si 100000 what would be e-po rate journal entries related to the finance lease for the second lease payment on December 31, 2018?Explanation / Answer
a. Possible advantages of leasing include:
1. lease can reduce the risk of obsolescence.
2. Lease can provide interest rate lower than the borrowing rate.
3. Leasing allows 100% financing at fixed interest rates as compared with 70% to 90% financing when assets are purchased.
4. Leasing can preserve the ability to borrow under lines of credit.
b. The lessee views a noncancelable lease as a capital lease if it meets at least one of the following criteria.
1. The lease transfers ownership of the property to the lessee at the end of the lease term.
2. It contains a bargain purchase option.
3. It is equal to 75% or more of the estimated economic life of the leased property.
4. The present value of minimum lease payments excludes executory costs or exceeds 90% of the fair value of the leased property.
1, 3 are not met. 2and 4 are met.
Present value of minimum lease payments, assuming a BPO:
Lease payments ($300,000 x 3.48685) $1,046,055
Bargain purchase price ($290,000 x 0.68301) 198,073
Total $1,244,128
In this case, it is a capital lease.
Otherwise:
Present value of minimum lease payments, assuming the purchase option is not a BPO:
Lease payments ($300,000 x 3.48685) $1,046,055
Fair value of vans $1,240,000
x 90%
90% of the fair value of the vans $1,116,000
In this case, it is an operating lease to the lessee.
Either way, it is a capital lease to the lessor:
Present value of minimum lease payments, assuming a BPO:
Lease payments ($300,000 x 3.48685) $1,046,055
Bargain purchase price ($290,000 x 0.68301) 198,073
Total $1,244,128
Present value of minimum lease payments, assuming the purchase option is not a BPO:
Lease payments ($300,000 x 3.48685) $1,046,055
Residual value ($300,000 x 0.68301) 204,903
Total $1,250,958
Since Interstate’s cost, $1,050,000, was less than its “selling price,” this is a sales-type lease to Interstate
c.
Interest expense ([$1,100,000 – 300,000] x 10%) 80,000
Lease liability 220,000
Cash 300,000
Operating expenses 1,000
Cash 1,000
If a BPO is assumed, VIP would have the vans for 7 years:
Depreciation expense ([$1,100,000 – 50,000] ÷ 7 yrs.)150,000
Accumulated depreciation 150,000
If a BPO is not assumed, VIP would have the vans for 4 years:
Depreciation expense ([$1,100,000 – 300,000] ÷ 4 yrs.)200,000
Accumulated depreciation 200,000
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