Question

The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee. Inception date: May 1, 2014 Annual lease payment due at the beginning of each year, beginning with May 1, 2014 $21,227.60 Bargain-purchase option price at end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset at May 1, 2014 $91,000 Lessor’s implicit rate 10 % Lessee’s incremental borrowing rate 10 % The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

What is the nature of the lease to Mooney Leasing Company and Rode Company?

Answer 1

	In the given case: It is Sale type lease for the Lessor(Mooney Leasing Company) & Finance Lease for the Leasee(Rode Company) due to the following reasons: 1. Present value of annual lease payment is $96,500 which is more than the fair value ($91,000)of the asset. 2. The leasee has bargain purchase option at the end of the lease term.
	The leasee should use a single accounting model for all type of lease unless it is of less than 1 year or nominal value. Therefore, the leasee shall record the lease liability & right in use asset in the given case.
	The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest(i.e., 10% p.a. in this case) or incremental borrowing rate(if implicit rate is not known) at lease commencement date . The lease liability is accounted for by the interest method subsequently and the ROU asset is subject depreciation on the straight-line basis over the lease term of 5 year.
	1)Calculation of lease liability
	Year	Payments (Cash flows)	Present Value Factor @10%p.a	Discounted Cash flows/ Present value
	1	$                                                                                  21,227.60	1.00000	$                               21,228
	2	$                                                                                  21,227.60	0.95238	$                               20,217
	3	$                                                                                  21,227.60	0.90703	$                               19,254
	4	$                                                                                  21,227.60	0.86384	$                               18,337
	5	$                                                                                  21,227.60	0.82270	$                               17,464
	5	$                                                                                    4,000.00	0.78353	$                                  3,134
	Total	$                                                                                110,138.00		$                               99,634
	2) Lease Amortisation Schedule:
Year	Opening lease liabilty	Annual Payments	Interest Liability @ 5%p.a	Closing lease liability
	a	b	c=(a-b)*5%	d=a-b+c
1	$                                  99,634	$                                                                                        21,228	$                       3,920	$                               82,326
2	$                                  82,326	$                                                                                        21,228	$                       3,055	$                               64,154
3	$                                  64,154	$                                                                                        21,228	$                       2,146	$                               45,072
4	$                                  45,072	$                                                                                        21,228	$                       1,192	$                               25,037
5	$                                  25,037	$                                                                                        21,228	$                           190	$                                  4,000
5	$                                    4,000	$                                                                                          4,000	$                             (0)	$                                        (0)
	Note: As the lease payment is To record made at the begining of the year, interest will be calculated on Opening lease liability less annual lease payment .
	· Please do upvote if you found the answer useful.
	· Feel free reach in the comment section in case of any clarification or queries.