On January 1, 2019, Amity Company leases a crane to Baltimore Company. The lease contains the following terms and provisions: • The lease is noncancelable and has a term of 10 years. • The lease does not contain a renewal or bargain purchase option. • The annual rentals are $4,150, payable at the beginning of each year. • Baltimore agrees to pay all executory costs directly to a third party. • The cost of the equipment to the lessor is $25,836.57. The fair value of the equipment is $27,300. • Amity incurs initial direct costs of $1,427.00. • The interest rate implicit in the lease is 12%. • Amity expects to collect all lease payments from Baltimore. • Amity estimates that the fair value at the end of the lease term will be $3,110 and that the economic life of the crane is 12 years. This value is not guaranteed by Baltimore. Required: 1. Next Level What are initial direct costs? Discuss the accounting treatment of these costs. Are they treated in the same manner for (a) an operating lease, (b) a sales-type lease, and (c) a direct financing lease? 2. From the lessor’s viewpoint, is the preceding lease a sales-type or direct financing lease? Give reasons to support your conclusion. 3. Prepare the journal entries for Amity for 2019.
On January 1, 2019, Amity Company leases a crane to Baltimore Company. The lease contains the following terms and provisions: • The lease is noncancelable and has a term of 10 years. • The lease does not contain a renewal or bargain purchase option. • The annual rentals are $4,150, payable at the beginning of each year. • Baltimore agrees to pay all executory costs directly to a third party. • The cost of the equipment to the lessor is $25,836.57. The fair value of the equipment is $27,300. • Amity incurs initial direct costs of $1,427.00. • The interest rate implicit in the lease is 12%. • Amity expects to collect all lease payments from Baltimore. • Amity estimates that the fair value at the end of the lease term will be $3,110 and that the economic life of the crane is 12 years. This value is not guaranteed by Baltimore. Required: 1. Next Level What are initial direct costs? Discuss the accounting treatment of these costs. Are they treated in the same manner for (a) an operating lease, (b) a sales-type lease, and (c) a direct financing lease? 2. From the lessor’s viewpoint, is the preceding lease a sales-type or direct financing lease? Give reasons to support your conclusion. 3. Prepare the journal entries for Amity for 2019.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
On January 1, 2019, Amity Company leases a crane to Baltimore Company. The lease contains the following terms and provisions:
• | The lease is noncancelable and has a term of 10 years. |
• | The lease does not contain a renewal or bargain purchase option. |
• | The annual rentals are $4,150, payable at the beginning of each year. |
• | Baltimore agrees to pay all executory costs directly to a third party. |
• | The cost of the equipment to the lessor is $25,836.57. The fair value of the equipment is $27,300. |
• | Amity incurs initial direct costs of $1,427.00. |
• | The interest rate implicit in the lease is 12%. |
• | Amity expects to collect all lease payments from Baltimore. |
• | Amity estimates that the fair value at the end of the lease term will be $3,110 and that the economic life of the crane is 12 years. This value is not guaranteed by Baltimore. |
Required:
1. | Next Level What are initial direct costs? Discuss the accounting treatment of these costs. Are they treated in the same manner for (a) an operating lease, (b) a sales-type lease, and (c) a direct financing lease? |
2. | From the lessor’s viewpoint, is the preceding lease a sales-type or direct financing lease? Give reasons to support your conclusion. |
3. | Prepare the |
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