Classifying Leases On January 1, Lessee Company leases equipment with a fair value of $2,000 from Lessor Company for 3 years, with no renewal options. The estimated life of the equipment is 5 years and there is no purchase option at the end of the lease term. The annual lease payment is $700, which includes a $50 charge for an annual maintenance contract. The first payment is due immediately. Lessee Company's incremental borrowing rate is 6% and the lessee is not readily able to determine the lessor's implicit interest rate. Title to the equipment remains with the lessor at lease end and the lessee does not guarantee the residual value at lease end. a. Determine the classification of the lease for Lessee Company Finance Lease O b. Determine the classification of the lease for Lessor Company. Sales-Type Lease 0 Option One Lease Classification Criteria Criterion Met? 1. Ownership transfer No 2. Purchase option No X Lease term length No Present value of lease payments Yes S No alternative use Yes ✔ ✔ 94 3 V of lease payments of s year lease term is 1.983 x is Analysis 60.0% of the asset's useful life of 99.2% of the asset's fair value of 1 5 years 2,000

Classifying Leases On January 1, Lessee Company leases equipment with a fair value of $2,000 from Lessor Company for 3 years, with no renewal options. The estimated life of the equipment is 5 years and there is no purchase option at the end of the lease term. The annual lease payment is $700, which includes a $50 charge for an annual maintenance contract. The first payment is due immediately. Lessee Company's incremental borrowing rate is 6% and the lessee is not readily able to determine the lessor's implicit interest rate. Title to the equipment remains with the lessor at lease end and the lessee does not guarantee the residual value at lease end. a. Determine the classification of the lease for Lessee Company Finance Lease O b. Determine the classification of the lease for Lessor Company. Sales-Type Lease 0 Option One Lease Classification Criteria Criterion Met? 1. Ownership transfer No 2. Purchase option No X Lease term length No Present value of lease payments Yes S No alternative use Yes ✔ ✔ 94 3 V of lease payments of s year lease term is 1.983 x is Analysis 60.0% of the asset's useful life of 99.2% of the asset's fair value of 1 5 years 2,000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Piper Specialty Store Ltd. completed the following merchandising transactions in the month of May 2021. At the beginning of May, Piper's ledger showed Cash $7,000; Accounts Receivable $1,900; Inventory $3,500; Common Shares $7,800; and Retained Earnings $4,600. Piper Specialty has experienced a return rate of 2% of sales and uses a perpetual inventory system. Purchased merchandise on account from Depot Wholesale Supply Ltd. for $5,340, terms 1/10, n/30, FOB shipping point. May 3 Freight charges of $137 were paid by the appropriate party on the merchandise purchased on May 1. Sold merchandise on account to Yip Company for $3,500, terms n/30, FOB destination. The cost of the merchandise was $2,400. 7 Freight charges of $86 were paid by the appropriate party on the May 4 sale. 8. Received a $140 credit from Depot Wholesale Supply when merchandise was returned. Paid Depot Wholesale Supply in full. 11 Purchased supplies for $390 cash. 14 Received payment in full from Yip Company for…
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