Question

Problem 21-2 (Essay)

Cleveland Inc. leased a new crane to Abriendo Construction under a 5-year noncancelable contract starting January 1, 2017. Terms of the lease require payments of $33,000 each January 1, starting January 1, 2017. Cleveland will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of $240,000, and a cost to Cleveland of $240,000. The estimated fair value of the crane is expected to be $45,000 at the end of the lease term. No bargain-purchase or -renewal options are included in the contract. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Abriendo’s incremental borrowing rate is 10%, and Cleveland’s implicit interest rate of 9% is known to Abriendo.

1. Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor.

2. Discuss what should be presented in the balance sheet, the income statement, and the related notes of both the lessee and the lessor at December 31, 2017.

Answer 1

Solution:

1). The rent is a working lease to the resident and lessor in light of the fact that:

it doesn't exchange proprietorship, doesn't contain a deal buy alternative, doesn't cover in any event 75% of the assessed financial existence of the crane, and the present estimation of the rent installments isn't in any event 90% of the reasonable estimation of the rented crane.

$33,000 Annual Lease Payments X PV of annuity due at 9% for a long time

$33,000 X 4.23972 = $139,910.76,

which is under $216,000.00 (90%*$240,000.00).

2). Abriendo as resident must unveil in the salary proclamation the $33,000 of lease cost and in the notes the future least rental installments required as of January 1 (altogether, $132,000) and for every one of the succeed­ing four years: 2015—$33,000; 2016—$33,000; 2017—$33,000; 2018—$33,000.

Nothing in respect to this rent would show up on the resident's accounting report.

Cleveland as lessor must reveal in a critical position sheet or in the notes the expense of the rented crane ($240,000) and the amassed deterioration of $18,750 independently from resources not rented. Moreover, Cleveland must unveil in the notes the base future rentals as an aggregate of $132,000, and for every one of the succeeding four years: 2015—$33,000; 2016—$33,000; 2017—$33,000; 2018—$33,000.

The pay proclamation for the lessor reports rental income and costs for protection, duties, support, and devaluation cost.

Particulars	Debit($)	Credit($)
Cash A/c Dr	$33,000
To rental revenue A/c		$33,000

Somewhere around one of the four criteria would have must be fulfilled for the rent to be named other than a working lease.