Fields Finance Ltd. (FFL), a leasing company that reports under ASPE, is in the process of preparing its financial statements for the year ended June 30, Year 1. The following leases were entered into: Lease 1: On February 1, Year 1, the company entered into a lease contract in respect of plant and machinery for a production line. The details are as follows: 12 quarterly rental payments $ 11,000 (first payment on April 30, Year 1) Period of contract 3 years (from February 1, Year 1) $200,000 Fair value of equipment (cost to FFL) Guaranteed residual value – end of lease $ 60,000 term Estimated residual value – end of useful $ 20,000 life Economic life 8 years 12% Implicit rate Lease 2: On April 1, Year 1, the company entered into a lease contract in respect of a fleet of distribution vehicles. This lease involves the following payments: Initial rental payment 10 quarterly rental payments Period of contract Fair value of equipment (cost to FFL) $190,000 Unguaranteed residual value – end $120,000 of lease term $ 30,000 (due April 1, Year 1) $ 6,000 (first payment due on July 1, Year 1) 3 years (from April 1, Year 1) $ 60,000 Estimated residual value – end of useful life Economic life 6 years 12% Implicit rate FFL depreciates all its equipment under operating leases on a straight-line basis. Required: a) Evaluate the leases and determine whether FFL (the lessor) should account for these leases as sales-type, direct financing and operating leases.
Fields Finance Ltd. (FFL), a leasing company that reports under ASPE, is in the process of preparing its financial statements for the year ended June 30, Year 1. The following leases were entered into: Lease 1: On February 1, Year 1, the company entered into a lease contract in respect of plant and machinery for a production line. The details are as follows: 12 quarterly rental payments $ 11,000 (first payment on April 30, Year 1) Period of contract 3 years (from February 1, Year 1) $200,000 Fair value of equipment (cost to FFL) Guaranteed residual value – end of lease $ 60,000 term Estimated residual value – end of useful $ 20,000 life Economic life 8 years 12% Implicit rate Lease 2: On April 1, Year 1, the company entered into a lease contract in respect of a fleet of distribution vehicles. This lease involves the following payments: Initial rental payment 10 quarterly rental payments Period of contract Fair value of equipment (cost to FFL) $190,000 Unguaranteed residual value – end $120,000 of lease term $ 30,000 (due April 1, Year 1) $ 6,000 (first payment due on July 1, Year 1) 3 years (from April 1, Year 1) $ 60,000 Estimated residual value – end of useful life Economic life 6 years 12% Implicit rate FFL depreciates all its equipment under operating leases on a straight-line basis. Required: a) Evaluate the leases and determine whether FFL (the lessor) should account for these leases as sales-type, direct financing and operating leases.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Fields Finance Ltd. (FFL), a leasing company that reports under ASPE, is in the process
of preparing its financial statements for the year ended June 30, Year 1.
The following leases were entered into:
Lease 1: On February 1, Year 1, the company entered into a lease contract in respect of
plant and machinery for a production line. The details are as follows:
12 quarterly rental payments
$ 11,000 (first payment on April 30,
Year 1)
Period of contract
3 years (from February 1, Year 1)
$200,000
Fair value of equipment (cost to FFL)
Guaranteed residual value – end of lease $ 60,000
term
Estimated residual value – end of useful $ 20,000
life
Economic life
8 years
12%
Implicit rate
Lease 2: On April 1, Year 1, the company entered into a lease contract in respect of a
fleet of distribution vehicles. This lease involves the following payments:
Initial rental payment
10 quarterly rental payments
Period of contract
Fair value of equipment (cost to FFL) $190,000
Unguaranteed residual value – end $120,000
of lease term
$ 30,000 (due April 1, Year 1)
$ 6,000 (first payment due on July 1, Year 1)
3 years (from April 1, Year 1)
$ 60,000
Estimated residual value – end of
useful life
Economic life
6 years
12%
Implicit rate
FFL depreciates all its equipment under operating leases on a straight-line basis.
Required:
a) Evaluate the leases and determine whether FFL (the lessor) should account for
these leases as sales-type, direct financing and operating leases.
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