Question

On January 1, 2014, Garfield Corp. (lessor) entered into a noncancellable lease agreement with Odie Corp. (lessee) for machinery which was carried in Garfield’s accounting records at $2,265,000 and had a fair value of $2,400,000. Minimum lease payments under the lease agreement, which expires on December 31, 2023, total $3,550,000. Payments of $355,000 are due each January 1. The first payment was made on January 1, 2014 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method is being used. Odie expects the machine to have a ten-year life with no residual value, and be depreciated on a straight-line basis. Collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the costs yet to be incurred by Garfield. Both entities are small private corporations that follow ASPE.

Instructions

a. From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor's viewpoint, what kind of lease is the above agreement?

b. Ignoring income taxes, what should be the income reported by Garfield from the lease for calendar 2014?

c. Ignoring income taxes, what should be the expenses incurred by Odie from this lease for the calendar 2014?

d. What journal entries should be recorded by Odie Corp. on January 1, 2014?

e. What journal entries should be recorded by Garfield Corp. on January 1, 2014?

Answer 1

On January 1, 2014, Garfield Corp. (lessor) entered into a noncancellable lease agreement with Odie Corp. (lessee) for machinery which was carried in Garfield’s accounting records at $2,265,000 and had a fair value of $2,400,000.