Accounting for Leases by Lessee and Lessor Scupper Farms, the lessee, and Tyrrell Equipment, the lessor, sign a lease agreement on January 1, 2016, that provides for Scupper to lease a cultivator from Tyrrell. The lease terms, provisions, and other related events are as follows: -The lease is noncancelable and has a term of 6 years -The annual rentals are $56,100 (including executory costs), payable at the beginning of each year. -Tyrrell agrees to pay all executory costs, which are expected to be $1,100 annually, including property taxes of $500, insurance of $350, and maitenance of $250. -The cultivator has an estimated economic life of 6 years. -Scupper guarantees a residual value of $60,000 at the end of 6 years. -The interest rate implicit in the lease is 14%, which is known by Scupper. -Scupper's incremental borrowing rate is 15%, and it uses the sum-of-the-years' digits method to record depreciation on similar equipment. -The cost and rair value of the cultivator to Tyrrell is $271,154.68 -The lessor incures no material initial direct costs. -The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be inccurred by the lessor. Required: 1. Identify the type of lease involved for both Scupper and Tyrrell and give reasons for your classifications. 2. Prepare the journal entries for both Scupper and Tyrrell for 2016 (hint: scupper should expense executory costs when annual payments are made to tyrrell.)
Accounting for Leases by Lessee and Lessor Scupper Farms, the lessee, and Tyrrell Equipment, the lessor, sign a lease agreement on January 1, 2016, that provides for Scupper to lease a cultivator from Tyrrell. The lease terms, provisions, and other related events are as follows: -The lease is noncancelable and has a term of 6 years -The annual rentals are $56,100 (including executory costs), payable at the beginning of each year. -Tyrrell agrees to pay all executory costs, which are expected to be $1,100 annually, including property taxes of $500, insurance of $350, and maitenance of $250. -The cultivator has an estimated economic life of 6 years. -Scupper guarantees a residual value of $60,000 at the end of 6 years. -The interest rate implicit in the lease is 14%, which is known by Scupper. -Scupper's incremental borrowing rate is 15%, and it uses the sum-of-the-years' digits method to record depreciation on similar equipment. -The cost and rair value of the cultivator to Tyrrell is $271,154.68 -The lessor incures no material initial direct costs. -The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be inccurred by the lessor. Required: 1. Identify the type of lease involved for both Scupper and Tyrrell and give reasons for your classifications. 2. Prepare the journal entries for both Scupper and Tyrrell for 2016 (hint: scupper should expense executory costs when annual payments are made to tyrrell.)
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter20: Accounting For Leases
Section: Chapter Questions
Problem 2E: Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement...
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Transcribed Image Text:Accounting for Leases by Lessee and Lessor Scupper
Farms, the lessee, and Tyrrell Equipment, the lessor, sign
a lease agreement on January 1, 2016, that provides for
Scupper to lease a cultivator from Tyrrell. The lease
terms, provisions, and other related events are as follows:
-The lease is noncancelable and has a term of 6 years
-The annual rentals are $56,100 (including executory
costs), payable at the beginning of each year.
-Tyrrell agrees to pay all executory costs, which are
expected to be $1,100 annually, including property taxes
of $500, insurance of $350, and maitenance of $250.
-The cultivator has an estimated economic life of 6 years.
-Scupper guarantees a residual value of $60,000 at the
end of 6 years.
-The interest rate implicit in the lease is 14%, which is
known by Scupper.
-Scupper's incremental borrowing rate is 15%, and it uses
the sum-of-the-years' digits method to record
depreciation on similar equipment.
-The cost and rair value of the cultivator to Tyrrell is
$271,154.68
-The lessor incures no material initial direct costs.
-The collectibility of the rentals is reasonably assured,
and there are no important uncertainties surrounding the
amount of unreimbursable costs yet to be inccurred by
the lessor.
Required:
1. Identify the type of lease involved for both Scupper
and Tyrrell and give reasons for your classifications.
2. Prepare the journal entries for both Scupper and Tyrrell
for 2016 (hint: scupper should expense executory costs
when annual payments are made to tyrrell.)
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