3rd Edition

ISBN: 9780136912644

Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella

Publisher: Pearson Education (US)

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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.

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Textbook Question

Chapter 18, Problem 18.7E

Classification as Finance or Operating Lease, Lessee, Journal Entries, Amortization Tables, Unguaranteed Residual Asset, Annuity Due. On January 1, Gump Sales Company entered into an agreement to lease a piece of machinery for a period of 5 years from Smokey Boy Equipment (SBE). The machine is not specialized for Gump’s business needs, has a sales price of $70,000, and its useful life is 7 years with no guaranteed residual value. The $15,000 annual rentals are due on January 1 of each year. The lease does not contain a transfer of ownership or a purchase option Assume that there are no initial direct costs associated with this lease. There are also no nonlease components SBE's implicit rate is not known to Gump whose incremental borrowing rate is 13%. The carrying value of the equipment to SBE is $70,000, its fair value. Assume that collectability of all lease payments is reasonably assured Gump's fiscal year ends on December 31.

Required

a. Determine the lease classification for Gump Sales.
b. Prepare the journal entries over Years 1-3 for Gump Sales based on your answer to part (a).
c. Include an amortization table for the lease liability and right-of-use asset.

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Chapter 18, Problem 18.6E

Chapter 18, Problem 18.8E

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Chapter 18 Solutions

Intermediate Accounting

Ch. 18 - Does the lessee become the owner of the equipment...Ch. 18 - Prob. 18.2Q Ch. 18 - Prob. 18.3Q Ch. 18 - What are typical terms and provisions in a lease...Ch. 18 - How does a lease offer business and financial...Ch. 18 - Prob. 18.6Q Ch. 18 - How is the right-of-use asset measured?Ch. 18 - What components are included in a lease contract?Ch. 18 - How does a lessee separate lease and nonlease...Ch. 18 - How does a lessor separate lease and nonlease...

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Solution Summary: The author explains that lease is a long-term rent agreement between two parties that is often clubbed with other clauses relating to maintenance or sale at the end of the lease period.

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Chapter 18 Solutions