Question

In: Accounting

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. The estimated economic life of the lease is 30 years.

5. Grant’s implicit interest is 12 percent: Pippin’s incremental borrowing rate is 10 percent.

6. The asset is recorded in Grant’s inventory at $75,000 just prior to the lease transaction.

7. Both companies use the straight-line depreciation method for all assts.

Required:

a. What type of lease is this for Pippin? Why?

b. Assume Pippin classifies the lease contract as the financial lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year of 2020 and 2021?

c. Assume Pippin classifies the lease contract as the operating lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year of year 2020 and 2021?

d. What type of lease is this for Grant? Why?

e. Assume Grant classifies the lease contract as the sales-type lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year of 2020 and 2021?

f. Assume Grant classifies the lease contract as the operating lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year of year 2020 and 2021?

Solutions

Expert Solution


Related Solutions

Leases (Lessee and Lessor) Hayes Corp. is a manufacturer of truck trailers. On January 1, 2018,...
Leases (Lessee and Lessor) Hayes Corp. is a manufacturer of truck trailers. On January 1, 2018, Hayes Corp. leases ten trailers to Lester Company under a six-year noncancelable lease agreement. The following information about the lease and the trailers is provided: 1.      The first payment of $100,146 is due on January 1, 2018, and each subsequent payment is made each year on December 31, starting December 31, 2018. The rate of return for Hayes is 8%. This is also the...
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...
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...
Ramsay Corp. (lessor) entered into a lease arrangement with Williams Corp. (lessee) on January 1, 2018....
Ramsay Corp. (lessor) entered into a lease arrangement with Williams Corp. (lessee) on January 1, 2018. According to the lease arrangement, Ramsay leased a building to Williams for 8 years. The building has an estimated economic life of 40 years with no residual value. The cost of the building was $2,500,000 and it was purchased for cash on January 1, 2018. Its fair value is $2,500,000 and it is to be depreciated on a straight line basis. At the end...
On January 2, 2020, Micheal (lessee) entered into a 10-year non-cancelable lease with Thomas (lessor) for...
On January 2, 2020, Micheal (lessee) entered into a 10-year non-cancelable lease with Thomas (lessor) for equipment. The following facts relate to the transaction: -The equipment has an estimated useful life of 13 years. -There is no purchase option. Transfer of ownership to Michael is not stipulated in the lease contract. -The fair value to Thomas (lessor) at the inception of the lease was $4,000,000. Lessor's cost was $3,775,000. Sales commissions were $2,500. -Michael's incremental borrowing rate is 10%. The...
On January 2, 2020, Michael (lessee) entered into a 10-year non-cancelable lease with Thomas (lessor) for...
On January 2, 2020, Michael (lessee) entered into a 10-year non-cancelable lease with Thomas (lessor) for equipment. Required Information: The equipment has an estimated useful life of 13 years. There is no purchase option. Transfer of ownership to Michael is not stipulated in the lease contract. The fair value to Thomas (lessor) at the inception of the lease was $4,000,000. Lessor's cost was $3,775,000. Sales commissions were $2,500. Michael's incremental borrowing rate is 10%. The implicit annual rate in the...
On 1 January 2020, Lessee Ltd entered into a two-years lease with Lessor Ltd for a...
On 1 January 2020, Lessee Ltd entered into a two-years lease with Lessor Ltd for a equipment. The contract contains an option to extend the lease term for a further a year. Lessee Ltd ascertained that it is reasonably certain to exercise this option. The equipment has a useful economic life of 10 years. Lease payments are $25,000 per year for the initial term and $45,000 per year for the period when the option is exercised. All payments are due...
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.
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?...
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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT