Question

Citron Inc. leased computers to Allidia Company on January 1, 2021. The cost of the computers to Citron was $12
million.
This noncancelable lease had the following terms:
 Lease payments: $2,466,754 semiannually; first payment at January 1, 2021; remaining payments at June 30
and December 31 each year through June 30, 2025.
 Lease term: five years (10 semiannual payments).
 No residual value; no purchase option.
 Economic life of equipment: five years.
 Implicit interest rate (known to Allidia): 5% semiannually.
 Fair value of the computers at January 1, 2021: $20 million.
Required
a. List out the 5 criteria for determination of lease treatment. Run all the tests (show all your calculations and
assumptions) and determine which, if any criteria are met.
b. What type of lease is this for Citron?
c. What type of lease is this for Allidia?
d. Show all journal entries by Citron on the date the lease is signed (1/1/21)
e. Show all journal entries by Allidia on:
1) 1/1/21
2) 6/30/21

Answer 1

Under finanace lease means lease that transfers substantially all the risks and rewards incidental to ownership of the underlying asset

Under operating lease means lease that doesn't transfers substantially all the risks and rewards incidental to ownership of the underlying asset

A) The following are considering while classifying the lease into financial lease/ determining the type of lease

• The lessor transfer the ownership of the underlying asset after the end of the lease term
• The lease term is the major part of the economic life of the asset even though it is not transfered
• At the inception date, the present value of all the lease payment amount is atleast a substantial part of the fair value of the asset
• THe lesse has a n option to purchase the asset at aprice which is substantially lower than the fair value of the asset at the date option exerciseble for it.
• The leased asset has a specifications that only lesse can use it.