Lease Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’. The criteria for defining the lease as finance lease or operating lease As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease: Transfer of title: The asset is transferred to lessee at the end of the lease period concerned. Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value. Economic life: The economic life of the lease period is 75% or more than the useful life of the asset. Value recovery: Present value of lease payments is greater or equal to 90% of the fair value. If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease . If a lease does not fulfil any of the above four criteria, it would be considered as operating lease . Present Value: The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value. To Classify: the type of lease by lessee and lessor.

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Answer 1

Question

Chapter 15, Problem 15.3P

1)

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

The criteria for defining the lease as finance lease or operating lease

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:

Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease. If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value.

To Classify: the type of lease by lessee and lessor.

(2)

To determine

To Prepare: the journal entry in the books of lessor (P’s leasing) and lessee (M-SU group).

(3)

To determine

To Prepare: the appropriate journal entry in the books of lessee (RM) assuming M-SU group leased directly from manufacturer.

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Answer 2

Question

Chapter 15, Problem 15.3P

1)

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

The criteria for defining the lease as finance lease or operating lease

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:

Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease. If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value.

To Classify: the type of lease by lessee and lessor.

(2)

To determine

To Prepare: the journal entry in the books of lessor (P’s leasing) and lessee (M-SU group).

(3)

To determine

To Prepare: the appropriate journal entry in the books of lessee (RM) assuming M-SU group leased directly from manufacturer.

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Answer 3

Question

Chapter 15, Problem 15.3P

1)

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

The criteria for defining the lease as finance lease or operating lease

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:

Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease. If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value.

To Classify: the type of lease by lessee and lessor.

(2)

To determine

To Prepare: the journal entry in the books of lessor (P’s leasing) and lessee (M-SU group).

(3)

To determine

To Prepare: the appropriate journal entry in the books of lessee (RM) assuming M-SU group leased directly from manufacturer.

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Answer 4

Question

Chapter 15, Problem 15.3P

1)

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

The criteria for defining the lease as finance lease or operating lease

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:

Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease. If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value.

To Classify: the type of lease by lessee and lessor.

(2)

To determine

To Prepare: the journal entry in the books of lessor (P’s leasing) and lessee (M-SU group).

(3)

To determine

To Prepare: the appropriate journal entry in the books of lessee (RM) assuming M-SU group leased directly from manufacturer.

Expert Solution & Answer

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Answer 5

Chapter 15, Problem 15.3P

1)

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

The criteria for defining the lease as finance lease or operating lease

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:

Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease. If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value.

To Classify: the type of lease by lessee and lessor.

(2)

To determine

To Prepare: the journal entry in the books of lessor (P’s leasing) and lessee (M-SU group).

(3)

To determine

To Prepare: the appropriate journal entry in the books of lessee (RM) assuming M-SU group leased directly from manufacturer.

Answer 6

Chapter 15, Problem 15.3P

1)

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

The criteria for defining the lease as finance lease or operating lease

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:

Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease. If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value.

To Classify: the type of lease by lessee and lessor.

Answer 7

Chapter 15, Problem 15.3P

1)

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

The criteria for defining the lease as finance lease or operating lease

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:

Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease. If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value.

To Classify: the type of lease by lessee and lessor.

Answer 8

(2)

To determine

To Prepare: the journal entry in the books of lessor (P’s leasing) and lessee (M-SU group).

Answer 9

(2)

To determine

To Prepare: the journal entry in the books of lessor (P’s leasing) and lessee (M-SU group).

Answer 10

(3)

To determine

To Prepare: the appropriate journal entry in the books of lessee (RM) assuming M-SU group leased directly from manufacturer.

Answer 11

(3)

To determine

To Prepare: the appropriate journal entry in the books of lessee (RM) assuming M-SU group leased directly from manufacturer.

Answer 12

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Answer 13

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Answer 14

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Answer 15

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To Prepare: the journal entry in the books of lessor (P’s leasing) and lessee (M-SU group).

To Prepare: the appropriate journal entry in the books of lessee (RM) assuming M-SU group leased directly from manufacturer.

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