The following are four independent situations.
On December 31, 2017, Wasicsko Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sales price of the machine was $480,000, the carrying amount is $420,000, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one year is $35,000. At December 31, 2017, how much should Wasicsko report as deferred revenue from the sale of the machine?
Wasicsko should report $60,000.
The person who gives the right to use the property or equipment for lease is known as the lessor. A lessor is the owner of the property. A lessee pays the amount of leased property in accordance with the lease agreement made between the lessor and the lessee.
A sale-leaseback transaction is often considered as a single financing transaction in which the seller defers and amortizes any profit on the sale.
However, the FASB modifies this general rule where only a small portion of the remaining use of the asset is retained or when more than a small portion but the remaining use of the asset is retained.
The first circumstance arises when the present value of the lease payment is 10% or less of the fair value of the sale-lease return asset. The second scenario is when the lease-back is more than marginal, but the capital for the entire asset sold does not match the terms of the lease.
Since this present value of lease payments ($35,000) is less than 10% of the property's fair value ($480,000), this problem is an example of the first situation. Under these terms, the sale and leaseback are treated as independent transactions. As a result, the entire profit ($480,000 - $420,000 = $60,000) is recognized.
(Accounting for an Operating Lease) On January 1, 2017, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.
(Lessor Computations and Entries, Sales-Type Lease with Unguaranteed Residual Value) George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $278,072, and its unguaranteed residual value at the end of the lease term is estimated to be $20,000. National will pay annual payments of $40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of $180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.
(c) Prepare all of the lessor’s journal entries for the first year.
(Lessee Computations and Entries, Capital Lease with Guaranteed Residual Value) Assume the same data as in P21-13 and that Chambers Medical Center has an incremental borrowing rate of 10%.
Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be $15,000. The hospital will pay rents of $60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of $250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.
(c) Prepare all of the lessee’s journal entries for the first year.
(Type of Lease; Amortization Schedule) Mike Macinski Leasing Company leases a new machine that has a cost and fair value of $95,000 to Sharrer Corporation on a 3-year noncancelable contract. Sharrer Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2017. Mike Macinski Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31.
(b) Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved.
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