On January 1 of Year 1, Ashe Company entered into a five-year equipment lease (with no renewal options) requiring payments of $10,000, with the first payment due immediately. The lessor's implicit interest rate, known to Ashe, is 6%. Ownership of the equipment remains with the lessor at expiration of the lease. There is no option to purchase the property at the end of the lease term and the equipment is expected to have no residual value. The equipment has an estimated economic life of five years. a. How would Ashe Company classify the lease? AnswerFinance leaseOperating lease b. Prepare a schedule of the lease liability for the 5-year lease term.

On January 1 of Year 1, Ashe Company entered into a five-year equipment lease (with no renewal options) requiring payments of $10,000, with the first payment due immediately. The lessor's implicit interest rate, known to Ashe, is 6%. Ownership of the equipment remains with the lessor at expiration of the lease. There is no option to purchase the property at the end of the lease term and the equipment is expected to have no residual value. The equipment has an estimated economic life of five years. a. How would Ashe Company classify the lease? AnswerFinance leaseOperating lease b. Prepare a schedule of the lease liability for the 5-year lease term.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 13E: Lessee and Lessor Accounting Issues Diego Leasing Company agrees to provide La Jolla Company with...

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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

On January 1 of Year 1, Ashe Company entered into a five-year equipment lease (with no renewal options)
requiring payments of $10,000, with the first payment due immediately. The lessor's implicit interest rate,
known to Ashe, is 6%. Ownership of the equipment remains with the lessor at expiration of the lease.
There is no option to purchase the property at the end of the lease term and the equipment is expected
to have no residual value. The equipment has an estimated economic life of five years.
a. How would Ashe Company classify the lease? AnswerFinance leaseOperating lease
b. Prepare a schedule of the lease liability for the 5-year lease term.
• Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for
later calculations in the schedule.

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Step 2: Requirement a- Classification of the lease:

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Step 3: Working note- Calculation of present value of lease liability:

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Step 4: Requirement b- Preparing a schedule of lease liability:

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