ACC 232 Financial Accounting Research Assignment 3

ACC 232 Financial Accounting Research Assignment 3

 

Issued: November 3, 2016

Due: November 17, 2016

 

Classifying Leases

 

Tom and Jerry, two accounting majors, are discussing the following lease.

On December 31, 2014, Lessee Ltd leased equipment from Lessor Ltd for a period of ten years. The lease payments of $150,000 are paid at the end of each year (first payment = December 31, 2015). The lease contains no purchase or renewal options. The remaining useful life of the equipment after the lease ends is five years. The cost and fair value of the equipment at the start of the lease is $1,000,000. At the end of the lease the equipment has a guaranteed residual value of $88,424 and will be transferred back to Lessor Ltd. The salvage value of the equipment at the end of its useful life is expected to be $20,000. The implicit rate on the lease is 9 percent. Lessor Ltd is confident that Lessee Ltd will make all payments under the lease and there is no uncertainty regarding any other future lease costs.

Tom argues that on December 31, 2016, Lessor Ltd should record the following entry:

Cash                                        150,000

Rent Revenue                                     150,000

 

Jerry disagrees and says the lease should be recorded differently on December 31, 2016.