Question

"SunlandCompany leased equipment to the Polan Company on July 1, Year 18, for a 10-year period expiring June 30, Year 28. Equal annual payments under the lease are $246000 and are due on July 1 of each year. The first payment was made on July 1, Year 18. The rate of interest contemplated by Sunland and Polan is 8%. The lease receivable before the first payment is$1740000 and the cost of the equipment on Sunland s accounting records was $1548000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Sunland, what is the amount of profit on the sale and the interest revenue that Sunland would record for the year ended December 31, Year 18?"

		$0 and $0
		$192000 and $139200
		$192000 and $119520
		$192000 and $59760

Which of the following is an advantage of leasing?

		Protection against obsolescence.
		Leases often do not require any down payment.
		Lease agreements may contain less restrictive provisions than other debt agreements.
		All of these answer choices are correct.

A lessee with a finance lease containing a bargain purchase option should depreciate the leased asset over the

		"life of the asset or the term of the lease, whichever is longer."
		term of the lease.
		period ending with the bargain purchase option date.
		asset's remaining economic life.

Answer 1

1. d. $ 192,000 and $ 59,760 is correct answer.

Particular	Amount
Finance Lease Value of Equipment	$ 1,740,000.00
Less: Cost of Equipment	$ 1,548,000.00
Gain from the Equipment	$      192,000.00
Particular	Amount
Finance Lease Liability	$ 1,740,000.00
Less: First Installment Payment on July 1, 2018	$      246,000.00
Remaining Finance Lease Liability	$ 1,494,000.00
Interest till December [ $ 1,494,000*8%*6/12]	$        59,760.00

2. d. all of the answer choices are correct.

Because leasing protected the entity against obsolescence, does not require leasee to pay down payment and also has less term and conditions then debt agreement.

3. (d) asset's estimated economic life.

Because when a bargain purchase is included in the lease, it is assumed that the lessee will take advantage of the bargain purchase at the end of the lease and acquire the asset. For this reason the lessee will control the asset for the asset’s estimated economic life. Therefore, the asset should be depreciated over the asset’s estimated economic life.