Question

Blossom Incorporated leases a piece of machinery to Pina Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $9,977 to be made at the beginning of each year. 2. The machinery' has a fair value of $53,600, a book value of $40,000, and an economic life of 10 years. At the end of the lease term, both parties expect the machinery to have a residual value of $20,000. To protect against a large loss, Blossom requests Pina to guarantee $13,750 of the residual value, which Irving agrees to do. 4. The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature. 5. The implicit rate is 5%, which is known by Pina. 6. Collectibility of the payments is probable. Click here to view factor tables. Evaluate the criteria for classification of the lease, and describe the nature of the lease. For the lessee, it is a , and for the lessor, it is a

Answer 1

A - 3 Insert Delete Format Insert Delete Format Cells AutoSum" AT 2 Clear Filter Cell Cell Styles Sort & Find & Select Editing H C = Bookl - Microsoft Excel Home Insert Page Layout Formulas Data Review View * Cut Calibri - 11 - A A = = = D Wrap Text General 19 La Copy Paste B I U B A Format Painter E S E Merge & Center - $ - % O , , 4.0.09 8.09 Conditional Conditional Format Format Formatting as Table Clipboard Font Alignment Number Styles Α1 А G In the given case: It is Finance Lease for the Lessor due to: Present value of annual lease payment and residual value(Guaranteed & unguaranteed) is $53,601 almost equal to the fair value ($53,600) of the asset. Payments (Cash Present Value Discounted Cash Year flows) Factor @5%p.a. flows/Present value 9,977.00 1 S 9,977 2 9,977.00 0.95238 $ 9,502 3 9,977.00 0.90703 $ 9,049) 4(Beginning) 9,977.00 0.86384 $ 8,619 4(Ending) 20,000.00 0.82270 $ 16,454 Total 59,908) 53,601 va un 10 11 12 In the books of Lessor(Blossom) Journal Entries for Sale type lease Particulars Date Debit Credit 13 53,600 15 S $ 40,000 13,600 14 01-01-20 Lease Receivable A/C To Equipment A/C 16 To Gain on sale of Equipment A/C (Being asset given on lease under sale type lease recorded) * Gain on sale= PV of lease payment & guaranteed & unguranteed residual value less cost of equipment=($53600- 18 $40000)=513600 19 20 01-01-20 Cash A/C 21 To Lease Receivable A/C 22 (Being lease payment received) $ 9,977.00 $ 9,977.00 23 $ 2,181 21011 24 31-12-20 Lease Receivable A/C Ta Inter ESC AIC Sheet83 (16) Sheet97 (3) Ready Circular References Sheet132 (2) Sheet144 Sheet59 (7) Sheet142 Sheet83 (15) Sheet83 (14) SHO BO 80% 0+ + P ill 1:45 AM 12-Apr-20

Bookl - Microsoft Excel Data Review View A QUE Home Insert Page Layout Formulas * Cut Calibri - 11 - A Paste Format Painter BZ B I U B V A Clipboard Font A1 fic = > Η Σ AutoSum. ' Α Eg Copy 3-Wrap Text E Merge & Center - General $ - % E E S = Insert Delete Format = , 8.09 Conditional Format Formatting as Table Styles Cell Styles 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells 19 $ 9,977.00 20 01-01-20 Cash A/C To Lease Receivable A/C (being lease payment received) $ 9,977.00 T T $ 2.181 $ 2,181 24 31-12-20 Lease Receivable A/C To Interest income A/C (Being interest income on lease recorded) *Interest Income= (Lease receivable less annual payment)*5%=($53600-9977)*5% =$2181 1) Lessee Accounting: Pina Further, there is no concept of Finance lease or operating lease for the Leasee. The leasee should use a single accounting model for all type of lease unless it is of less than 1 year or nominal value. Therefore, the leasee shall record the lease liability & right in use asset in the given case. The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest(i.e., 5% p.a. in this case) or incremental borrowing rate(if implicit rate is not known) at lease commencement date. The lease liability is accounted for by the interest method subsequently and the ROU asset is subject to depreciation on the straight-line basis over the lease term of 4 year. The leasee shall record the lease liability (Present value of Lease payment & expected residual value, if guaranteed ) & right in use asset in the given case. Year Payments (Cash Present Value flows) Factor @5%p.a. 9,977.00 1 9,977.00 0.95238 IS 9,977.00 0.90703 $ 9,977.00 0.86384 13,750.00 0.82270 CO col Sheet132 (2) Sheet144 Sheet59 (7) Discounted Cash flows/Present value S 9,977 $ 9,502 $ 9,049) $ 8,619 $ 11,312 37 4(Beginning) 4(Ending) 38 Sheet97 (3) Sheet142 Sheet83 (15) Sheet83 (14) SHU ► Ready Sheet83 (16) Circular References 80% + BO 2 1 0+ :45 AM 12-Apr-20

C = Bookl - Microsoft Excel Insert Page Layout Formulas Data Review View Home * Cut A = > Η Σ AutoSum. ' Α En Copy Format Painter Calibri B I U - 11 B Font - A A 3-Wrap Text E Merge & Center - General $ - % Paste E S , 8.09 Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format 2 Clear Sort & Filter Editing Find & Select Clipboard Alignment Number Cells A1 1 L 4 1 Beginning) I Ending 9,977.000 S13 750 001 0.86384 $ 0.82270] $ 8,619 11,312 48,459 1 Total $ 53.658 In the books of leasee Journal Entries Particulars Debit Credit $ 48,459 $ 48,459 01-01-20 Right of Use Asset A/C To Lease liabilty A/C (Being initially recognise the lease- related asset and liability.) $ 9977 1-01-20 Lease liabilty A/C To Cash A/C (To record lease payment) 9,977 $ 1924 $ 1,924 Interest expense A/C To Lease liabilty A/C (Being interest expense & lease liablity (48459-9977)*5% $ 12. 115 $ 12,115 31-12-20 Amortisation expense A/C TO ROU Asset A/C (To record depreciation expense on the ROU asset) (48459/4 yr) 2 62 Now when the leasee didnot provide any guaranteed residual value, then the Lease Receivable would be recoreded at Present Value of lease payment & unguaranteed residual value) $ 42.289 which is 80% of fair value of the asset. Therefotre still it is finance lease for Lessor Payments (Cash Present Value Discounted Cash Sheet83 (16) Sheet97 (3) Sheet132 (2) Sheet144 Sheet59 (7) Sheet142 Sheet83 (15) Circular References Sheet83 (14) SHU HE Ready BOJ 80% 0+ É 12-Apr-20

O = Bookl - Microsoft Excel Insert Page Layout Formulas Data Review View Home * Cut = = = D Calibri BI A Eg Copy - 11 - A A A Wrap Text Merge & Center - General $ - % AutoSum" AT - 3 Insert Delete Format U D SE , 8.09 19 Conditional Format Formatting as Table Styles Cell Styles 2 Clear Paste Format Painter Clipboard E85 Sort & Filter Editing Find & Select Font Alignment E Number Cells Now when the leasee didnot provide any guaranteed residual value, then the Lease Receivable would be recoreded at Present Value of lease payment & unguaranteed residual value) $ 42.289 which is 80% of fair value of the asset. Therefotre still it is finance lease for Lessor Payments (Cash Present Value Discounted Cash Year flows) Factor @5%p.a. flows/ Present value $ 9,977.00 11 S 9,977 $ 9,977.00 0.95238 $ 3 $ 9,977.00 0.90703 $ 9,049 4(Beginning) $ 9,977.00 0.86384 $ 8,6191 4(Ending) $ 6,250.00 0.82270 $ 5,142 Total $ 46,158 42,289 The leasee shall record the lease liability & right in use at Present value of Lease payment only as no guarantee is given. Year 2 Payments (Cash flows) 9,977.00 9,977.00 9,977.00 9,977.00 39,908 Present Value Discounted Cash Factor @5%p.a. flows/ Present value 11 S 9,977 0.95238 $ 9,502 0.90703 $ 9,049 0.86384 $ 8,619 37,147 75 76 77 4(Beginning) Total 78 79 80 In the books of Leasee Journal Entries Particulars 81 Year Debit Credit 82 37,147 37,147 83 01-01-20 Right of Use Asset A/C 84 To Lease liabilty A/C (Being initially recognise the lease- 85 related asset and liability.) Sheet97 (3) Sheet132 (2) Sheet144 Sheet59 (7) Sheet142 Sheet83 (15) Sheet83 (14) SHU ► Ready Sheet83 (16) Circular References + 20 U80% 2 + :47 AM N É 1 ) 12-Apr-20

Con = Bookl - Microsoft Excel Insert Page Layout Formulas Data Review View Home Cut = = = Η Σ AutoSum. ' Α Eg Copy Calibri B I - 11 - A D- A A Wrap Text E Merge & Center - General $ - % U E E , 8.09 Cell Styles Insert Delete Format Conditional Format Formatting as Table Styles 2 Clear Paste Format Painter Clipboard E85 Sort & Filter Editing Find & Select Font Alignment Number Cells I lournal Entries Particulars Debit 1 Credit $ 37,147 $ 37,147 01-01-20 Right of Use Asset A/C To Lease liabilty A/C (Being initially recognise the lease- related asset and liability.) 85 $ 9977 01-01-20 Lease liabilty A/C To Cash A/C (To record lease payment) IS 9,977 $ 1.358 12-20 Interest expense A/C To Lease liabilty A/C (Being interest expense & lease liablity $ 1,358 9,287 31-12-20 Amortisation expense A/C $ 9.287 TO ROU Asset A/C R $ (To record depreciation expense on the 98 ROU asset) 99 100 - Please do upvote if you found the answer useful. 101. Feel free to reach in the comment section in case of any clarification or queries. 132500 100 7420 Sheet97 (3) Sheet132 (2) Sheet144 Sheet59 (7) Sheet142 Sheet83 (15) Sheet83 (14) Sh Sheet83 (16) Circular References Ready BOJ 80% + + P ill 1:47 AM 12-Apr-20