Question

In: Accounting

On January 1, 2020, Nivtop Corp. leased a machine from Nosnah Inc. The lease agreement calls...

On January 1, 2020, Nivtop Corp. leased a machine from Nosnah Inc. The lease agreement calls for Nivtop to make four annual lease payments of $559,113 each January 1, with the first payment to be made on January 1, 2020. Nivtop’s incremental borrowing rate is 8%; this is the same rate Nosnah used to calculate the lease payments. The fair market value of the machine is $2,000,000 and its expected useful life is 5 years. This is a non-specialized machine.

Nosnah purchased the machine from a vendor on December 31, 2019 for $1,573,000.

Required
a.List the 5 criteria used to determine whether a lease qualifies as finance/sales-type or operating. Review each criterion to determine which (if any) this lease meets.

b.What type of lease is this for Nivtop?

c.What type of lease is this for Nosnah?

d.Show all of Nivtop’s journal entries relative to this lease at
1)January 1, 2020
2)December 31, 2020
3)January 1, 2021

e.Show all of Nosnah’s journal entries relative to this lease at
1)January 1, 2020
2)December 31, 2020
3)January 1, 2021

Solutions

Expert Solution

Solution:

Calculation of PV of Lease Payments
Lease Payment 559113
No of periods 4
Interest rate per period 8.00%
PV annuity due Factor @ 6% for 7years 3.57710
PV of Lease Paymenst (100000* PV factor) 2000000
It is a Finance Lease to Nivtop
Satisfying any one of th followingit satisfies two 4 criteria makes a lease a finance lease. Here its satisfies two
Transfer of Ownership No information given
Bargain purchase option available4 No
Is the lease term equal to 75% or more than the estimated economic life of the property Yes; It is 4/5 = 80% of economic life of the property
Is present value of the minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the property, Yes, it is 100% . PV of lease payments = 2000000
Alternate use test - Is the underlying asset is of a specialised nature No
It is a Sales type lease for Nosnah
The decising criteria is the same as the lessee for the lessor'

Journal Entries:

Journal Entries - IN the Books of Lessee - Niv top
Date Particulars Debit Credit
Jan 01, 2020 Right of use asset 2000000
    Lease Payable 2000000
Jan 01, 2020 Lease Payable 559113
   Cash 559113
Dec 31,2020 Interest Expense 115271
   Lease Liability 115271
    
Dec 31,2020 Amortization Expense 500000
Right-to- Use Asset 500000
(To record Amortization Expense (2000000/4)
Journal Entries - IN the Books of Lessor - Nosnah
Date Particulars Debit Credit
Jan 01, 2020 Lease Receivable 2000000
Cost of Goods Sold 1573000
    Sales Revenue     2000000
   Inventory 1573000
Jan 01, 2020 Cash 559113
   Lease Receivable 559113
    
Dec 31,2020 Lease Receivable 115271
    Interest Revenue 115271

Amortization Schedule for Interest Calculation:

Lease Amortization Schedule
Date Lease Payment (A) Interest Expense (B) = (D) *Interest Rate Reduction in Liability (C) = (A) - (B) Lease Liability (D) = (D) - (C)
Jan 01, 2020 2000000
Jan 01, 2020 559113 559113 1440888
Jan 01, 2021 559113 115271 443842 997046
Jan 01, 2022 559113 79764 479349 517697
Jan 01, 2023 559113 41416 517697 0
Total 2236451 236450 2000000

Hope this helps! In case of any clarifications, kindly use the comment box below


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