Question

In: Accounting

Lessee leases printing machine from Lessor. Lessor agrees to provide all maintenance services. Lease payment is...

Lessee leases printing machine from Lessor. Lessor agrees to provide all maintenance services. Lease payment is $1000 per month. Maintenance service has FMV of $200/month.

Over what period does a Lessee amortize the Right of Use Asset in a Financing lease? Operating lease?

How does the Lessee’s amortization of Right of Use Asset differ between Financing lease and Operating lease?

How does Lessee report the amortization and interest components of lease expense on the income statement under an Operating Lease?

How does the Lessee determine the appropriate discount rate to use in accounting for leases?

How does the Lessor’s discount rate differ when initial direct costs are capitalized versus when they are not capitalized?

At what amount does a Lessor measure the “Investment in Lease” asset account in a Sales lease? Direct Financing lease?

In a Sales lease in which the leased asset cost differs from market value at lease inception, how much sales revenue does the Lessor recognize? How much cost of sales does the Lessor recognize?

Solutions

Expert Solution

Q1. Over what period does a Lessee amortize the Right of Use Asset in a Financing lease? Operating lease?
Ans. Financing Lease: Lessee amortize the right to use of assets when assets is given on lease for whole econimic life of assets
                                    Ex. If life of assets is 10 year and the assets us given for a period of 9.5 year then in this case lessee can amortize the right to use
Operation Lease: Lessee can never amortize the right of use asset in case of operating lease
Q2. How does the Lessee’s amortization of Right of Use Asset differ between Financing lease and Operating lease?
Ans. In case of financing lease the leesee becomes the owner of the assets after the expiry of lease period by giving a nominal amount but in case of operating lesase
assesse never become the owner of the assets
Q3. How does Lessee report the amortization and interest components of lease expense on the income statement under an Operating Lease?
Ans. In case of operating lease the lessee reports the amortization and interest components as lease rent payment
Q4. How does the Lessee determine the appropriate discount rate to use in accounting for leases?
Ans. The lessee uses Internal Rate of Return concept to determine the appropriate dicount rate.
Q5. How does the Lessor’s discount rate differ when initial direct costs are capitalized versus when they are not capitalized?
Ans. When the initial costs are capitalized then the cost of assets got increased as compared to when initial cost are not capitalized, that why the discount rate differs.
Q6. At what amount does a Lessor measure the “Investment in Lease” asset account in a Sales lease? Direct Financing lease?
Ans. The gross amount of the investment in the lease is calculated as:
Sum of minimum lease payments, less executory cost component + Unguaranteed residual value benefiting lessor
Q7. In a Sales lease in which the leased asset cost differs from market value at lease inception, how much sales revenue does the Lessor recognize? How much cost of sales does the Lessor recognize?
Ans. Sale price - Gross amount of investment in the lease- Initial direct costs+ Present value of unguaranteed residual value benefiting the lessor
= Unearned income

Related Solutions

Lessee leases copy machine from Lessor. Lessor agrees to provide all maintenance service. Lease payment is...
Lessee leases copy machine from Lessor. Lessor agrees to provide all maintenance service. Lease payment is $1000 per month. Maintenance service has FMV of $200/month. What are the lease components within this contract? What amount of lease payment will be used in measuring the lease liability/payable by Lessee/Lessor? How will the Lessee and Lessor account for initial direct costs? At what amount does a Lessee measure the Lease liability in a Financing lease? Operating lease? At what amount does a...
Lessor leases asset to lessee. Lease term is 5 years. Lease payment is $20,000/month + greater...
Lessor leases asset to lessee. Lease term is 5 years. Lease payment is $20,000/month + greater of $5,000 or 2% of lessee’s monthly sales revenue. Lessor’s implicit rate is 12%/year and this rate is known by lessee. Payments are due at the end of the month. No payment was due at the signing of the lease. Required 1. Calculate the present value of the lease payments that will be used in measuring the lessee's lease payable. Please show calculations/explain.
Lessor enters into a seven-year lease for equipment with Lessee. Lessor sells and leases the equipment,...
Lessor enters into a seven-year lease for equipment with Lessee. Lessor sells and leases the equipment, which is not specialized in nature and is expected to have an alternative use for Lessor at the end of the lease term. Under the lease: Lessor receives annual lease payments of $25,000, with the first one payable at the commencement of the lease and one payment annually at the lease anniversary date thereafter. Lessor expects the residual value of the equipment to be...
A lease is an arrangement under which a lessor agrees to allow a lessee to control...
A lease is an arrangement under which a lessor agrees to allow a lessee to control the use of identified property, plant, or equipment for a stated period of time in exchange for one or more payments. There are several types of lease designations, which differ if an entity is the lessee or the lessor. The choices for a lessee are that a lease can be designated as either a finance lease or an operating lease. Respond to the following...
Lessor leasing company agrees to lease equipment to Lessee corp. on Jan 1, 2019, both Lessor...
Lessor leasing company agrees to lease equipment to Lessee corp. on Jan 1, 2019, both Lessor and Lessee follows IFRS. The following information relates to the lease agreement: the lease term is 7 years, no renewal, Lessor acquired the equipment this day Jan 1, 2019 for $560,000 cash, the useful life 10 years at the end of the term the equipment to be returned to the lessor with guaranteed residual value of $40,000 the lease agreement require annual rental payments...
Lamplighter Company, the lessor, agrees to lease equipment to Tilson Company, the lessee, beginning January 1,...
Lamplighter Company, the lessor, agrees to lease equipment to Tilson Company, the lessee, beginning January 1, 2016. The lease terms, provisions, and related events are as follows: • The lease is noncancelable and has a term of 8 years. • The annual rentals are $32,000, payable at the end of each year. • Tilson agrees to pay all executory costs. • The interest rate implicit in the lease is 14%. • The cost of the equipment to the lessor is...
On January 1, Year 1, lessor leases equipment to lessee. Data on the lease: Equipment fair...
On January 1, Year 1, lessor leases equipment to lessee. Data on the lease: Equipment fair value and lessor's book value, $25,771 (asset is new) Lessor's implicit rate and lessee's implicit borrowing rate, 8% Lease payments due each December 31 through Year 3 (three-year lease term) Useful life of equipment, three years (no residual value) Payments are due at the end of the year (ordinary annuity). 1. Lessor's Calculation of Lease Payments with No Residual Value 2. Lessee's Calculation of...
Ivanhoe Leasing Company (lessor) agrees to lease equipment to Sarasota Construction (Lessee) on January 1, 2017....
Ivanhoe Leasing Company (lessor) agrees to lease equipment to Sarasota Construction (Lessee) on January 1, 2017. The following information relates to the lease agreement. (a) the term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. (b) the cost of the machinery is $653,420 , and the fair value of the asset on January 1, 2017, is $887,406. (c) At the end of the lease term, the asset...
Case 13-2 Lessee and Lessor Accounting for lease (Modified) On January 2, 2020, Grant Corp. leases...
Case 13-2 Lessee and Lessor Accounting for lease (Modified) On January 2, 2020, Grant Corp. leases an asset to Pippin Corp. under the following conditions (Assume new lease accounting standard (ASC 842) are effective for both companies). 1. Annual lease payments are $10,000 for 20 years. 2. At the end of the lease term, the asset is expected to have a value of $2,750. 3. The fair value of the asset at the inception of the lease is $92,625 4....
A lessor and a lessee signed a lease agreement that qualifies as a finance/sales-type lease and...
A lessor and a lessee signed a lease agreement that qualifies as a finance/sales-type lease and calls for annual lease payments of $26,269 over a six-year lease term. The asset's estimated useful life is also six years. The first payment is due on January 1st, which is the beginning of the lease. The interest rate is 5%. Based on these facts, the present value of the lease payments (which are equal to the value of the asset to the lessor)...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT