On 1 July 2019, Cars Limited signed a 7-year non-cancelable lease for equipment that requires equal rental payment of $3,500,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $15,000,000, an estimated useful life of 10 years and no residual value. The lease does not transfer title or contain a bargain-purchase option. The Cars Limited’s incremental borrowing rate is 15% and PVIFA (n=7, i=15%) is 4.1604. RequiredIndicate and explain the type of lease Cars Limited signed in 2019. Include a separate analysis for the scenarios where Cars Limited is the lessee and lessor.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

On 1 July 2019, Cars Limited signed a 7-year non-cancelable lease for equipment that requires equal rental payment of $3,500,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $15,000,000, an estimated useful life of 10 years and no residual value. The lease does not transfer title or contain a bargain-purchase option. The Cars Limited’s incremental borrowing rate is 15% and PVIFA (n=7, i=15%) is 4.1604.

Required
Indicate and explain the type of lease Cars Limited signed in 2019. Include a separate analysis for the scenarios where Cars Limited is the lessee and lessor.

Expert Solution
steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Lease accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education