Case 21-2 (CA21-2) (Lessor and Lessee Accounting and Disclosures) 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 of 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
Brenton. Using either rate in the lease is 9%. Sylvan has no way of
knowing the implicit rate used by Brenton. 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 executor costs directly, and no allowance for the
costs is included in the lease payments.
Brenton is reasonably certain that Sylvan will pay all lease payments,
and because Sylvan has agreed to pay all executor cost, there are no
important uncertainties regarding costs to be incurred by Breton. Assume
that no indirect cost are involved.
Instructions:
(a) With respect to Sylvan (the lessee), answers the following.
(1) What type of lease has been entered into? Explain the reason for your reason.
(2) How should Sylvan compute the appropriate amount to be recorded for the else or asset acquired?
(3) What accounts will be created or affected by the transaction, and
how will the lease or asst and other cost related to the transaction be
matched with earnings.
(4) What disclosures must Sylvan make regarding the leased asset?
(b) With respect to Breton (the lessor). Answer the following:
(1) What type of leasing arrangement has been entered into? Explain the reason for your reason.
(2) How should the lease be recorded by Brenton, and how are the appropriate amounts determined?
(3) How should Breton determined the appropriate amount of earning to be recognized from each lease payment?
(4) What disclosures must Breton make regarding the lease?
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