Question

Image Maker Company enters into a lease of nonspecialized digital imaging equipment with Agee Equipment Inc on January 1, 2020. Image Maker Company is a manufacturer of digital imaging equipment that uses both direct sales and leases as a means of selling its products. The following table summarizes information about the lease and the leased assets:

- Lease term - five years, no renewal option

- Economic life of the leased equipment - six years

- Purchase option - None

- Annual lease payments - $1,100

- Payment date - Annually on January 1 (first payment is made at lease commencement)

- Fair value of the leased equipment - $5,000

- Image Maker Company's carrying value of the leased equipment - $4,500

- Interest rate implicit in the lease - 7.04%

- The present value of the lease receivable is $3,722

- The present value of the unguaranteed residual asset is $178

- Title to the asset remains with Image Maker Company upon lease expiration

- Agee Equipment Inc does not guarantee the residual value of the equipment at the end of the lease term and Image Maker Company does not obtain any third-party residual value insurance

- Estimated fair value of the equipment at the end of the lease term is $250

- Agee Equipment Inc pays for all maintenance of the equipment separate from the lease

- There are no initial direct costs incurred by Agee Equipment Inc

- Image Maker Company does not provide any incentives

- Images Maker Company determines that the lease is a sales-type lease

Required:

a. How would Image Maker Company measure and record this lease?

b. How would Image Maker Company account for the leasing transaction after the lease commencement?

Answer 1

1.) Maker company will record this lease as Capital lease because the lease term is 83.33% of economic life of asset as it satify the condition of lease term is greater than or equal to 75% of the useful life of the asset. It will record the lease receivable at $ 3,900 ( 3,722 + 178 ).

2.)	Date	Account Titles & Explanation	Debit $	Credit $
	January 1,2020	Lease Receivable	3,900
		Cost of goods sold	4,500
		Sales Revenue		3,900
		Equipment		4,500
		( to record the lease )
	January 1,2020	Cash	1,100
		Lease Receivable		1,100
		( to record the receipt )
	December 31,2020	Interest Receivable	197
		Interest Income		197
		( 3,900 - 1,100 ) x 7.04%
		( to record the interest accrue )