a) On January 1, 2019, a new standard for the accounting treatment of lease transactions came into effect. Discuss three significant differences between the new lease standard and the previous standard.
a) On January 1, 2019, a new standard for the accounting treatment of lease transactions came into effect. Discuss three significant differences between the new lease standard and the previous standard.
b) Boswell Manufacturing Company has been in business for five years. The
company has now decided to expand its operations. To finance this process, the company is considering two approaches:
(1) Lease the assets that are needed on a long term basis or
(2) Issue bonds and use the proceeds to purchase the assets.
The CEO is seeking your advice on the matter. Without knowledge of the
comparative cost involved, how would you advise him in the following questions:
(i) What might be the advantages and disadvantages of leasing the assets
instead of owning them. (List at least three advantages and three
disadvantages)
(ii) How will leasing the assets instead of owning them affect the financial
statements?
c) The information below relates to a leasing arrangement between Frankfield Leasing Company and Boswell Manufacturing Company, a lessee.
Inception date January 1, 2020
Lease term (non cancellable), 5 years
Annual lease payment due at the beginning of each
year beginning January 1, 2020, $28,500
Fair value of asset at January 1, 2020, $130,000
Economic life of leased equipment, 6 years
Residual value of equipment at end of lease term, unguaranteed by the lessee, $25,270
Lessor’s implicit rate (not known by the lessee), 6%
Lessee’s incremental borrowing rate, 8%
The asset will revert to the lessor at the end of the lease term. There is an expected residual value of $25,270 which is unguaranteed by the lessee. The lessee uses the
(Round all figures to the nearest $1.)
Instructions:
(i) What is the lease liability for Boswell Manufacturing Company?
(ii) Record the lease on Boswell’s books at the date of inception.
(iii)Record the first year’s depreciation on Boswell’s books.
(iv)Record interest expense and lease liability for Boswell Company for the year ending December 31, 2020.
(v) Discuss the nature of this lease to Frankfield Leasing Company. (Explain the rationale for your answer)
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