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Ment date the lessor will recognize any selling

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ment date, the lessor will recognize anyselling profit or lossequal to the following:the fair value of the underlying assetless the carrying amount of the underlying asset net of any unguaranteed residual assetless any deferred initial direct costs of the lessor12Note that it is possible for a sales-type lease to result in a profit of $0.12FASB ASC 842-30-25: Leases, Lessor, Recognition20-22Chapter 20Accounting for LeasesNot For Sale
Example: Sales-Type LeaseOn January 1, 2019, Solitaire Company, an equipment manufacturer, leases equipmentto Meadowlark Company with the terms and provisions shown inExample 20.4.13Solitaire determines that the lease qualifies as a sales-type lease based on the capitali-zation and revenue recognition criteria inExample 20.4a.EXAMPLE20.4Terms and Provisions of Lease Agreement between Solitaire Company(Lessor) and Meadowlark Company (Lessee) Dated January 1, 20191.The cost of the equipment is $120,000. The fair value is $190,008.49.2.No initial direct costs are incurred by Solitaire Company.3.The term of the lease is 10 years, with annual payments of $30,000 received at thebeginning of each year. The estimated economic life of the equipment is also10 years.4.Meadowlark Company agrees to pay all executory costs.5.The lease contains an option for Meadowlark to buy the equipment for $500 at theend of the lease term, December 31, 2025, which Meadowlark is reasonably cer-tain to exercise.6.The interest rate implicit in the lease is 12%.7.The present value of 10 payments of $30,000 at 12% on an annuity-due basis, plusthe present value of the purchase option, is $190,008.49, calculated as follows:Present value of 10 amounts in advance at 12%(6.3282503$30,000)5$189,847.50Plus: Present value of $500 discounted for10 years at 12% (0.3219733$500)5160.99Total present value5$190,008.498.The collectability of the payments is probable.EXAMPLE20.4aApplication of Lease Classification Criteria by Solitaire Company (Lessor)Classification Criteria1. Transfer of ownershipNo2. Purchase option reasonably certain to beexercisedYes3. Lease term is for a major part of economiclifeYesThe lease term is 100% ofeconomic life4. Present value of lease payments andguaranteed residual value is substantially allthe fair value of the assetYesThe present value is$190,008.49 or100% of fair valueestimated fair value5. The underlying asset is of a specializednatureNoDecision:If the lease meets one or more of the classification criteria, it is a sales-type.Conclusion:The lease is a sales-type lease because appropriate criteria are met.13Solitaire, the lessor, records the manufacturing costs of the equipment in the normal manner. If the lessor was a dealer in the assetbeing leased the asset would be recorded at the dealer’s acquisition cost.How Does a Lessor Account for and Report a Lease?20-23Not For Sale
Solitaire records the following journal entry on the lease commencement date:Initial Recording of the Sales-Type LeaseJan. 1, 2019Lease Receivable190,008.49Sales Revenue190,008.49Jan. 1, 2019Cost of Goods Sold120,000.00Equipment Leased to Others120,000.00The journal entry records the “sale” of the asset. Several items should be noted:

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Term
Spring
Professor
griffin
Tags
Finance lease, hawk, Executory Costs

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