Sax Company signs a lease agreement dated January 1, 2016, that provides for it to lease computers from Appleton Company beginning January 1, 2016. The lease terms, provisions, and related events are as folovs: 1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. 2. The computers have an estimated ife of 5 years, a fair value of 5300,000, and a zero estimated residual value. 3. Sax agrees to pay all executory costs. 4. The lease contains no renewal or bargain purchase option. 5. The annual payment is set by Appleton at 583,22 92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate, which is equal to its borrowing rate. 6. Sax uses the straight-line method to record depreciation on similar equipment. Required: 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax 2. Calculate the amount of the asset and liability of Sax at the inception of the lease. 3. Prepare a table summarizing the lease payments and interest expense 4. Prepare journal entries for Sax for the years 2016 and 2017. 5. Next Level if the lease term is 3 years and the annual payment is $110,000, how would Sax classity the lease under (a) U.S. GAAP and (b) IFRS?
Sax Company signs a lease agreement dated January 1, 2016, that provides for it to lease computers from Appleton Company beginning January 1, 2016. The lease terms, provisions, and related events are as folovs: 1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. 2. The computers have an estimated ife of 5 years, a fair value of 5300,000, and a zero estimated residual value. 3. Sax agrees to pay all executory costs. 4. The lease contains no renewal or bargain purchase option. 5. The annual payment is set by Appleton at 583,22 92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate, which is equal to its borrowing rate. 6. Sax uses the straight-line method to record depreciation on similar equipment. Required: 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax 2. Calculate the amount of the asset and liability of Sax at the inception of the lease. 3. Prepare a table summarizing the lease payments and interest expense 4. Prepare journal entries for Sax for the years 2016 and 2017. 5. Next Level if the lease term is 3 years and the annual payment is $110,000, how would Sax classity the lease under (a) U.S. GAAP and (b) IFRS?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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need help with parts 4 and 5
Transcribed Image Text:**Lease Agreement Analysis for Sax Company**
Sax Company entered into a lease agreement dated January 1, 2016, for leasing computers from Appleton Company starting January 1, 2016. The lease terms, provisions, and related events are specified as follows:
1. **Lease Term**: The lease spans 5 years. It is non-cancelable and mandates equal rental payments at the end of each year.
2. **Computers' Valuation**: The computers have an estimated life of 5 years, a fair value of $300,000, and a zero estimated residual value.
3. **Execution Costs**: Sax agrees to handle all executory costs.
4. **Purchase Option**: The lease does not include any renewal or bargain purchase option.
5. **Annual Payment**: Set by Appleton at $83,222.92 to yield an internal rate of return of 12% on its net investment. Sax is aware of this rate and equates it to its borrowing rate.
6. **Depreciation Method**: Sax employs the straight-line method for depreciation on similar equipment.
**Required Tasks**:
1. **Next Level Analysis**: Examine and assess each capitalization criterion to determine the lease type for Sax.
2. **Asset and Liability Calculation**: Compute the asset and liability amount Sax will recognize at the lease's inception.
3. **Payment and Interest Table**: Construct a table detailing the lease payments and interest expense.
4. **Journal Entries**: Draft the journal entries for Sax for the years 2016 and 2017.
5. **Next Level Classification**: If the lease term is 3 years with an annual payment of $110,000, determine how Sax would classify the lease under:
- (a) U.S. GAAP
- (b) IFRS
This analysis demands a thorough understanding of lease terms and accounting standards, ensuring compliance with both U.S. GAAP and IFRS.
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