Question

In: Accounting

Explain how the guarantee of a residual value may (or may not) affect a lessee’s initial...

Explain how the guarantee of a residual value may (or may not) affect a lessee’s initial recording and subsequent accounting related to a lease.

Solutions

Expert Solution

In context of financial lease, lessee records the initial recognition of the asset on lower of fair value or PV of MLP.

MLP or minimum lease payment is the sum of lease rentals payable and residual value guaranteed by the lessee to the lessor.

Therefore if lessee guarantees the residual value at a lower amount such that the PV of MLP becomes lower than fair value of the asset, then initial recognition shall be made at a lower amount than fair value and accordingly the aseset is reflected at a lower value in the balance sheet and lower depreciation is available.

In the final year of lease, after all lease payments are over, the lessor is reflected at fan amount equal to the guaranteed residual value of asset in the books of lessee.

Accordingly a higher GRV shall have opposite effects. However if PV of MLP becomes higher than fair value of the asset then no further effect is seen.


Related Solutions

Accounting for lessee finance lease including executory costs and residual value guarantee under ASU 2016-02 (ASC...
Accounting for lessee finance lease including executory costs and residual value guarantee under ASU 2016-02 (ASC 842). On January 1, 2017, Bares Trees Company signed a three-year noncancelable lease with Dreams Inc. The lease calls for three payments of $62,258.09 to be made at each year-end. The lease payments include $3,000 of executory costs related to service. The lease is nonrenewable and has no bargain purchase option. Ownership of the leased asset reverts to Dreams at the end of the...
Using the 12 graphs explain: 1) How does the initial reactant concentration affect: the initial reaction...
Using the 12 graphs explain: 1) How does the initial reactant concentration affect: the initial reaction rate? the overall reaction order? the rate constant? 2) How does the temperature affect: the initial reaction rate? the overall reaction order? the rate constant? 3) How can the instantaneous rate of reaction be determined from the graphs? 4) How can the reaction order for a specific chemical species be determined from the graphs? 5) How can the rate constant be determined from the...
6. Assume a machine with initial cost of 22 m. €, residual value of 7 m....
6. Assume a machine with initial cost of 22 m. €, residual value of 7 m. €, useful life of 5 years, expected output of 5,000 units and actual output of 800 units in year 1, 600 units in year 2, 2,000 units in year 3 and 800 units in year 4 and 5. The declining balance rate is 40%. a) Calculate the depreciation per year for the straight-line (linear) method, declining/reducing balance method and the production unit (usage) method....
1. How does malonate affect the initial velocity of succinate dehydrogenase? 2. Explain why initial velocity...
1. How does malonate affect the initial velocity of succinate dehydrogenase? 2. Explain why initial velocity varies directly with enzyme concentration, and how this related to the Michaelis Menten equation 3. How does malonate affect the initial velocity of an reaction? 4. What feature(s) of malonate makes it a competitive inhibitor of SDH?
Describe what is meant by a normal force gradient and explain how this may affect the...
Describe what is meant by a normal force gradient and explain how this may affect the resonance frequency of a cantilever.
Explain what the arbitrage of money (or goods) is. How does this affect the value of...
Explain what the arbitrage of money (or goods) is. How does this affect the value of the countries’ currencies?
Explain how the development of the internet is likely to affect the development of global value...
Explain how the development of the internet is likely to affect the development of global value chains?
Which item(s) is (are) included in the computation of the lessee’s present value of minimum lease...
Which item(s) is (are) included in the computation of the lessee’s present value of minimum lease payments? Select one: a. Executory costs, but not guaranteed salvage value b. Guaranteed Salvage Value, but not Executory Costs c. Both Executory Costs and guaranteed Salvage Value d. Neither Executory Costs nor guaranteed Salvage Value
Explain the relationship of time value and options, how does it affect pricing of options, how...
Explain the relationship of time value and options, how does it affect pricing of options, how it is looked at in business etc. Make sure to discuss the time value of money and its mathematical calculations. Explain how options prices are derived? What are ALL the factors that affect options prices? What are the advantages and disadvantages of trading options instead of equities? be detailed and include them all. Describe in detail the two kinds of options contracts that exist,...
write a statement to guarantee that the initial will be a capital letter. write the code...
write a statement to guarantee that the initial will be a capital letter. write the code in jsGraph
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT