Question

Question: (Lessee-Lessor Entries, Operating Lease) 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.

Instructions

(c) 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.

Short answer

Answer

Abriendo must disclose rent expenditure.

Cleveland must disclose the leased crane and the accumulated depreciation.

Step-by-step solution

Meaning of Lease agreement

A lease arrangement refers to a lease contract recognizing a similar arrangement for a specified period in which the lessee is expected to pay the lessee, in whole or in part, the use of a piece of the lease for a specified period in lieu of payment time it goes.

Explaining the item that should be presented in the balance sheet, the income statement, and the related notes of both the lessee and the lessor

Abriendo, as lessee, must declare in the income statement the $33,000 in rent expenditure and the future minimum rental payments necessary as of January 1 (in total, $132,000) and for each of the next four years: 2018—$33,000; 2019—$33,000; 2020—$33,000; 2021—$33,000. This lease would have no effect on the lessee's financial sheet.

Cleveland, as lessor, must separately report the cost of the rented crane ($240,000) and the accrued depreciation of $18,750 from assets not leased in the balance sheet or in the notes. Furthermore, Cleveland must disclose in the notes the minimum future rentals as a total of $132,000, as well as for each of the next four years: 2018—$33,000; 2019—$33,000; 2020—$33,000; 2021—$33,000.

The lessor's income statement shows rent revenue as well as costs for insurance, property taxes, maintenance and repairs, and depreciation.