Chapter 20, Problem 3E

Lessee Accounting Issues 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 follows:

1. 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. 2. The computers have an estimated life of 5 years, a fair value of $300,000, and a zero estimated residual value.
3. 3. Sax agrees to pay all executory costs.
4. 4. The lease contains no renewal or bargain purchase option.
5. 5. The annual payment is set by Appleton at $83,222.92 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. 6. Sax uses the straight-line method to record depreciation on similar equipment.

Required:

1. 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax.
2. 2. Calculate the amount of the asset and liability of Sax at the inception of the lease (round to the nearest dollar).
3. 3. Prepare a table summarizing the lease payments and interest expense.
4. 4. Prepare journal entries for Sax for the years 2016 and 2017.
5. 5. Next Level If the lease term is 3 years and the annual payment is $110,000, how would Sax classify the lease under (a) U.S. GAAP and (b) IFRS?