The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee

E21-9 Lessee and Lessor Accounting Issues

The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee. Assume that the lease payments are made at the ginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a three-year life.

REQUIRED:
1. Record the lease (including the initial receipt of $2,000) and the receipt of the second and third installments of $2,000 in the accounts of the Anson Company. Carry computations to the nearest dollar.

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(Lessee-Lessor Entries, Sales-Type Lease) Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2010

Problem 21-1 (P21-1) (Lessee-Lessor Entries, Sales-Type Lease) Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2010. The following information relates to the lease agreement.

1 The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years
2 The cost of the machinery is $ 525,000, and the fair value of the asset on January 1, 2010, is $700,000.
3 At the end of the lease term the asset reverts to the lessor. At the end of the lease term the asset has guaranteed residual value of $ 100,000. Jensen depreciates all if its equipment on a straight-line basis
4 The lease agreement requires equal annual rental payments, beginning on January 1, 2010.
5 The collectability of the lease payments is reasonable predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6 Glaus desires a 10% rate of return on its investments. Jensen's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.

Instructions:
(Assume the accounting period ends on December 31)
(a.) Discuss the nature of this lease for both the lessee and the lessor.
(b.) Calculate the amount of the annual rental payment required.
(c.) Compute the present value of the minimum lease payments.
(d.) Prepare the journal entries Jensen would make in 2010 and 2011 related to the lease arrangements.
(e.) Prepare the journal entries Glaus would make in 2010 and 2011.

Click here for the solution: (Lessee-Lessor Entries, Sales-Type Lease) Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2010

(Lessor and Lessee Accounting and Disclosures) Sylvan Inc. entered into a noncancelable lease arrangement with Breton Leasing Corporation for a certain machine

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?

Click here for the solution: (Lessor and Lessee Accounting and Disclosures) Sylvan Inc. entered into a noncancelable lease arrangement with Breton Leasing Corporation for a certain machine