Harlander Corporation leased industrial equipment to American Manufacturing on January 1, 2019. The following facts pertain to the lease: The lease term is 4 years. The annual lease payment is due at the beginning of each year starting on January 1, 2019. Each annual lease payment is $269,282 Ownership does not transfer at the end of the lease term and there is no bargain purchase option. The asset is not of a specialized nature. The industrial equipment has a fair value of $1,000,000, a book value to Harlander Corporation of $900,000, and a useful life of 5 years. American Manufacturing depreciates similar equipment using the straight-line method. The lease contains a guaranteed residual value of $50,000. The expected residual value is greater than $50,000. Harlander Corporation wants to earn a return of 8% on the lease, and collectability of the payments is probable. This rate is known by American Manufacturing. American Manufacturing’s incremental borrowing rate is 6%. Instructions How would Harlander Corporation (lessor) and American Manufacturing (lessee) classify this lease? Explain your answer with support.

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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Harlander Corporation leased industrial equipment to American Manufacturing on January 1, 2019. The following facts pertain to the lease:

The lease term is 4 years.
The annual lease payment is due at the beginning of each year starting on January 1, 2019. Each annual lease payment is $269,282
Ownership does not transfer at the end of the lease term and there is no bargain purchase option.
The asset is not of a specialized nature.
The industrial equipment has a fair value of $1,000,000, a book value to Harlander Corporation of $900,000, and a useful life of 5 years. American Manufacturing depreciates similar equipment using the straight-line method.
The lease contains a guaranteed residual value of $50,000. The expected residual value is greater than $50,000.
Harlander Corporation wants to earn a return of 8% on the lease, and collectability of the payments is probable. This rate is known by American Manufacturing.
American Manufacturing’s incremental borrowing rate is 6%.

Instructions

How would Harlander Corporation (lessor) and American Manufacturing (lessee) classify this lease? Explain your answer with support.

Prepare the Lease Amortization Schedule for American Manufacturing (Lessee).

Date	Lease Payment	Interest on Lease Liability	Reduction of Lease Liability	Lease Liability
1/1/2019
1/1/2019
1/1/2020
1/1/2021
1/1/2022

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