Chapter 21: Q5Q (page 1239)
Distinguish between minimum rental payments and minimum lease payments, and indicate what is included in minimum lease payments.
The difference between the two is that minimum rental payments are done by the lessee and received by the lessor, while the lessee makes the minimum lease payments.
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The following are four independent situations.
(d) On January 1, 2017, Sondgeroth Co. sold equipment with an estimated useful life of 5 years. At the same time, Sondgeroth leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value) of the equipment was \(212,700, the carrying amount is \)300,000, the monthly rental under the lease is \(6,000, and the present value of the rental payments is \)115,753. For the year ended December 31, 2017, determine which items would be reported on its income statement for the sale-leaseback transaction.
(Lessor and Lessee Accounting and Disclosure) Sylvan Inc. entered into a noncancelable lease arrangement with Breton Leasing Corporation for a certain machine. Breton’s primary business is leasing; it is not a manufacturer or dealer. Sylvan will lease the machine for a period of 3 years, which is 50% of the machine’s economic life. Breton will take possession of the machine at the end of the initial 3-year lease and lease it to another, smaller company that does not need the most current version of the machine. Sylvan does not guarantee any residual value for the machine and will not purchase the machine at the end of the lease term.
Sylvan’s incremental borrowing rate is 10%, and the implicit rate in the lease is 9%. Sylvan has no way of knowing the implicit rate used by Breton. Using either rate, the present value of the minimum lease payments is between 90% and 100% of the fair value of the machine at the date of the lease agreement.
Sylvan has agreed to pay all executory costs directly, and no allowance for these costs is included in the lease payments. Breton is reasonably certain that Sylvan will pay all lease payments. Because Sylvan has agreed to pay all executory costs, there are no important uncertainties regarding costs to be incurred by Breton. Assume that no indirect costs are involved.
Instructions
(a) With respect to Sylvan (the lessee), answer the following.
A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.
Inception date | May 1, 2017 |
Annual lease payment due at the beginning of each year, beginning with May 1, 2017 | \(21,227.65 |
Bargain-purchase option price at end of lease term | \) 4,000.00 |
Lease term | 5 years |
Economic life of leased equipment | 10 years |
Lessor’s cost | \(65,000.00 |
Fair value of asset at May 1, 2017 | \)91,000.00 |
Lessor’s implicit rate | 10% |
Lessee’s incremental borrowing rate | 10% |
Instructions
(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the lessor.
(c) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2017, 2018, and 2019. The lessor’s accounting period ends on December 31. Reversing entries are not used by Mooney.
Describe the effect of a “bargain-purchase option” on accounting for a capital lease transaction by a lessee.
The following are four independent situations.
(c) On January 1, 2017, McKane Corp. sold an airplane with an estimated useful life of 10 years. At the same time, McKane leased back the plane for 10 years. The sales price of the airplane was \(500,000, the carrying amount \)379,000, and the annual rental $73,975.22. McKane Corp. intends to depreciate the leased asset using the sum-of-the-years’-digits depreciation method. Discuss how the gain on the sale should be reported at the end of 2017 in the financial statements.
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